Finding the Balance between Lifestyle and Long-Term Goals
This podcast and the financial planning work we do for many of you on a one-on-one basis are all designed to give you more choices in your life. This goal implies that choice is good. In the context intended, it is. For example, having the option to leave an unsatisfying job or to take your children to Disneyland is definitely a good choice.
There are also other financial decisions that we must all make every day. These choices are largely about finding the right balance between living life now and having a wonderful lifestyle versus saving money to reach bigger goals.
Balance is key. It’s not a good idea to focus on just one thing. It’s not worth living a miserable existence today to achieve an early retirement. You never know what will happen with your health, your relationships, or the future. Living in the present and not saving for the future can also lead to financial anxiety and stress in later years.
How can you achieve the perfect balance? There is no one right answer. The answer will be different for everyone. Let’s look at some ways to think about what is the best solution for you.
Set long-term goals to achieve your objectives.
In this struggle between saving for today and spending tomorrow, it is assumed that you have future goals in mind. Many of us have vague and nebulous long-term goals. One day, retire, be comfortable, and perhaps even own a home.
If you are struggling to find this balance, I would suggest spending some time to get more clarity about what your long-term objectives are. Take a notebook to a park or coffee shop and imagine how your life will look in 20 or 30 years. Do this with your partner if you have one. It’s not necessary to be specific, and your lifestyle may change. However, it’s hard to deny yourself money now if you don’t understand the purpose of it. It’s easier to choose home-cooked meals over takeaways when you can afford to go on a fantastic trip overseas or to own your house debt-free.
The High-Income Trap
Most of our clients have household incomes above $200,000. It is important to note that this level of income can be a trap for people who feel that their income will remain high. They may put off making the necessary financial decisions that are needed for long-term financial security. It could be a sense of entitlement to live an affluent lifestyle, or it could be a social pressure to keep pace with others. This could be reflected in spending large amounts on expensive restaurant meals and cocktail bars, frequent trips abroad, flying business class even when the economy would suffice, and renting an apartment or house located in a prestigious suburb.
You can get caught up in the hamster wheel of trying to keep up with your peers. You must have an expensive European vehicle, and it can’t be older than three years. You can’t own the beach house during the summer holidays or the private school fees for your children. So you rent it. It’s expensive to maintain the kids, as they become accustomed to living this way. I worked briefly with a barrister who earned a high income. However, when we saw their balance sheet, it was a disaster. The spending was incredible. They were young adults, but they had no self-control. They just charged everything on their credit card. In his fifties, the husband began to realize that if they continued on their current path, he would be working well into his eighties. This is a very extreme example of the trap of high income.
Cashflow Management
On the podcast, I talk a lot about cash flow management. Regular listeners know that I don’t believe in budgeting or tracking every dollar you spend. If we want to achieve this balance between lifestyle and long-term goals, we must have a mechanism in place by which our expenses can be kept below our income. There are several ways to manage cash flow, but the bucket strategy is one of the most popular. In my book, Financial Autonomy, I discuss several of these strategies. There’s an audiobook edition, as well as the hard copy and digital versions. I know that podcast listeners love it.
What is the role of an emergency fund?
It is important to include an emergency fund in your financial plan. Generally, this fund should equal between three to six months of income after taxes. The emergency fund should consist of readily available cash. You may have a mortgage in your offset account.
You can use your emergency fund to cover unexpected, large expenses. For example, you might need to replace your fridge or pay for expensive car repairs. If you have family living overseas, it may be necessary to make an emergency trip home if a relative is in danger.
In these situations, those without an emergency fund may have to use their credit cards and struggle for months or even years before they can get back on track. In the context of the post on striking a balance between lifestyle and long-term goals, a lack of an emergency fund may mean that you have to sell investments intended for long-term goals. Compounding will make it difficult to maintain your financial position 20 years from now if you sell $5,000 of shares in order to pay for major car repairs. In 20 years, $5,000 is worth around $30,000. This sum could have funded a wonderful overseas vacation at retirement.
What is the role of investing?
How does investing fit into this balancing act? You have a clear idea of your long-term goals. You’ve also got a cash flow strategy that allows you to have a surplus each month. You can use this extra cash to create an emergency fund. But what happens after that?
As you might have guessed, the next step in your journey is to invest. There are many options to choose from, all with their pros and cons. Compounding your savings is a great way to secure your future and give you financial freedom.
Financial Safety Net
Your emergency fund is a good idea, but it won’t cover you for some of life’s more rare but very important curveballs. You may be unable to work due to a heart attack st, roke, or a mental disorder.
Another important aspect of the puzzle is to have adequate personal insurance. This will provide you with financial security. This cover will ensure that a serious health problem does not compromise your long-term goals.
Insurance isn’t cheap, of course. So, when we discuss the appropriate level of insurance with clients, it is always about finding the right balance between enough coverage and not too much. Insurance payouts are not meant to be compared with winning the lottery. You need just enough coverage to get you back on your feet and not be permanently knocked from your path.
The Gold of Delayed Gratification
We’re talking about delayed gratification when we consider the balance between having fun and spending money now versus saving for long-term goals. In an interesting academic study on delayed gratification, it was consistently found that we are happier when we reach a long-term goal than if we get a quick sugar rush.
It’s not that I think spending money on things that bring you short-term happiness should be cut back. If you work steadily towards a goal you have set, you will find that the short-term sacrifices you make to achieve it are completely forgotten by the joy and satisfaction you experience when you reach that difficult goal you set for yourself.
You can change your mindset to one of enjoyment by imagining how fun you will have on that trip to Europe or when you leave your high-stress job to work in an environment that brings you joy. You can find a great deal of happiness by delaying gratification.
Financial advice is valuable.
You may need assistance in identifying or prioritizing your long-term goals. You may have sorted out your long-term goals, but you are still unsure about the investment part. You might want to consider if professional financial advice is something you would benefit from. Of course, I am biased. Financial planning is my profession, my way of providing for my family. I’ve worked with clients for many years, and I’m confident that people who are willing to work with an adviser over time will benefit greatly.
Consider whether it’s time to start a relationship with a financial planner if you are struggling to find the right balance between your lifestyle and your long-term goals.
