Financial advice often comes down to the steps a person can take to achieve a specific goal. If you want to pay off your student loan debt faster, for example, tips will detail specific steps you need to take to lower your discretionary spending and increase your loan repayments. Based on this increase, you can determine how long it will take to pay off the loan.
In practice, however, creating a financial plan and building financial independence requires making choices. Sometimes the choice is obvious, like should you save money for retirement in a savings account or an investment portfolio? (If you want money to grow faster than inflation, then it has to go into a mix of stocks and bonds.)
Other times, however, these choices create real-world changes in our well-being, our sense of financial security, and even impact our attitude towards how we see ourselves. Part of the strategy behind the Early Retirement for Financial Independence (FIRE) movement is to remove this focus on money and its impact on our well-being in order to determine where we can spend to produce the most happiness in the world. our life.
For example, if you love travel, a member of the FIRE movement would suggest making sure you spend money on travel and cutting back on whatever you can to increase savings rates and budget for more travel.
Such an approach allows us to focus on the areas of our life where money has the most impact, while saving everything else.
But even if you have gone through this process and cut back considerably, you may still be faced with decisions, which impact how much money you grow and the goals you achieve. Here are some common and difficult decisions you will face when you are ready to make a financial plan or in the process of executing.
Savings Against Debt Payment
There is good news on the battle between whether you need to save more or pay off your debt faster. No matter which way you choose, it’s hard to go terribly wrong.
The arguments in favor of earmarking money for saving and investing for retirement relate to compound interest. The sooner you put money into your retirement account, the greater the impact of compound interest can be throughout your life. Suppose you invested $ 10,000 30 years ago and never added another dime. With a growth rate of 6% and annual membership, the money would reach $ 57,400. A big reason for growth has to do with the composition of returns over time.
To enjoy the composition, however, there is one requirement: time. Therefore, the need to put the money in the retirement account as early in life as possible creates tension in this decision-making process.
Meanwhile, paying down debt also has a very big impact on the ability to save, invest, spend and plan. Having a minimum student loan payment of $ 500 each month can sap resources and limit options when you are facing financial problems. This encourages debt reduction more quickly.
But if you reduce debt, it means saving less while you’re doing it. So how do you choose? Often, this will be the interest rate on the debt. If the interest on the debt is lower than the expected returns on savings, you may want to focus on the investment by weighing the two options. For example, if you have debt that only has 4% interest or you can invest money beyond the debt payment in an S&P 500 index fund, which has historical returns after a 7% inflation, then you can consider investing instead of paying off the debt faster. Then again, if you have credit card debt with an annual percentage rate of 19% increasing the amount you owe each day, then getting rid of it is the best financial decision.
Of course, many believe that debt will hold you back in other ways, serving as an albatross flying overhead until it is gone. If that’s what you think about debt, then improving your well-being can always have a value that worsens over time as well.
Save money compared to having fun
One of the most difficult battles you could face in your planning, as well as in your day-to-day financial decisions, is whether to put off the fun in order to save more. There is a direct correlation with reducing your spending – so potentially cutting spending on fun things – to increase the amount of money you can spend on retirement at the end of each month.
If this battle is getting too much, then it’s time to tackle what you think is fun or cut your savings. After all, you don’t want to save for the future by living in poverty today.
Instead, turn to the things that really give you joy, happiness, or whatever emotion is most meaningful to you. What activities are above all else in this thought experiment? Expenses should continue as needed in this area of your budget.
Now that you know where the expenses you should be keeping are located, where can you reduce your budget? Does five days a week food delivery really add value? What about magazine subscriptions? Or the luxury vehicle? Cutting down on the areas that don’t provide that emotional weight will give you more money for the savings part, without making the battle between fun and savings too difficult.
Time for money
What do you care about most, having enough time to do the things you want to do or having enough money? People are divided, according to a recent poll. TIAA-CREF surveyed people aged 27 to 75, finding that 55% of those surveyed were more concerned about not having enough time to do the things they want to do in life.
On the flip side, 45% said they were worried about running out of money to do the things they want.
The split embodies the battle you may face as you think about your goals. You want to make sure you achieve certain goals in life, even though you may need enough funds to achieve them.
The good thing about those who fear running out of time? Of those who had this concern, 45% said early retirement was a top priority.
Sometimes addressing your biggest concern is the best way to plan. If the fear of wasting time leads to higher savings rates and stronger retirement portfolios, then it’s a concern that can positively impact the rest of your life. This makes it a battle worth fighting for.