Finance Today: What’s ‘Truly’ Important

Living for Now While Protecting Tomorrow

In the wake of the “great recession”, many people are a major expense away from a cash crisis, or don’t have enough “safe” money for a long retirement beyond the subsistence of social security. All this is on the background of a persistently strong middle class expectation in the U.S., so people are often reluctant to change patterns of behavior. But they have little choice: Prepare as best they can for the future, or boost their tolerance for a life of more work and lean living.

Meanwhile, many are looking to live more simply and sustainably, considering the effects of high consumption in global markets and the natural world. After all, the “slow motion train wreck” can apply to more than just peoples’ finances. So it’s all-around a good time to ask ourselves what’s really important. Because the older we get, the more exposed we may be to big expenses, and the fewer productive years we have to recover from them. But it’s rarely too late to improve our future financial security and quality of life.

What Are You Going to Do?

With stagnant incomes and fewer good jobs, those who have yet to fully recover from economic tumult understandably worry about less controllable costs like medical bills, car & home repair, and taxes. And about the ability to thrive in retirement on mediocre savings. But they often overlook things they can have an effect on, like peripheral expenses that buy little true happiness but can end up huge over time.

Other than income, expenses (large and small & frequent), are the root influence on long term financial health. Many people end up scraping by; some because they truly couldn’t build capital over the years, and some because they’re just bad at planning and saving. They may feel that they’ve worked hard and deserve a carefree retirement, but they’re less likely to have it. They are more vulnerable to rapid asset depletion if they can’t generate enough income.

Are you one of the millions? If you’re not investing new funds on the dips of the financial markets (one of the few ways of bettering your odds), you may be. If you think much more about spending money than about saving it, and you’re not “paying yourself first”, you probably are. But that can change!

We must typically build assets in order to maintain an emergency buffer and keep our standard of living into retirement. Social security was meant as insurance against abject poverty, not generally to support a full retirement. So where does that leave us?

Some have generous pensions or matched 401Ks. For the rest, it’s especially important to consistently save, and eventually invest in a diversified portfolio. The risks can vary, but it’s our chance at maintaining purchasing power, whether for basics, a vacation or healthcare. We can try to tip the balance as much as possible in our favor instead of those whose mission is to take our money. Because although consumer spending is 70% of the U.S. economy, it does little good if it’s at the expense of our financial health and we must cut back more later.

Wealth can be impacted by anything from unexpected expenses to investment timing. The latter is especially true for those who don’t regularly invest, and reinvest (vs. spend) their interest/dividends, and buy much of their portfolio at high prices. Their money often doesn’t grow by the averages touted by advisers. But among the financially secure, there are typically the elements of diligence, self-discipline (or the “spending discipline” President Obama and others credit for their financial freedom), and an eye for value. That doesn’t necessarily mean being unfulfilled, but rather weighing the true worth of what they buy, and whether it’s an investment in quality of life. It’s about economy: Achieving maximum effect for the least cost. And ultimately about being empowered to step outside the dull routines that can make our years seem to evaporate.

So the best we can do is optimize our resources, and regularly invest any surplus money. But half-assed efforts are rarely enough when dealing in relatively modest amounts over long periods. It must become a habit. Many people either build or destroy wealth, and their ability to deploy investment capital, with numerous transactions over the years of less than fifty dollars each. So the value of diligence can’t be overstated. The good news is that if our standards aren’t unrealistically high, we can still enjoy life while fighting the ravages of cost-of-living inflation. Research shows that despite society becoming more money-centric, Americans are generally not happier than in past decades. So our priority should be the security of the basics like food/healthcare/shelter/transit, and attaining real enlightenment and fulfillment, vs. the mindless hyper-consumerism so common in today’s world.

Along with the essentials, most of us still like a little luxury, but in that pursuit many Americans throw away thousands of dollars that could be invested in their future. So it’s vital to be smart about indulgence. As Donna Freeman of Getting Rich Slowly and MSN’s Frugal Cool puts it, “If you do these things automatically vs. mindfully, your money just evaporates into purchases you can’t really remember“. Think back ten years (often over a quarter million dollars in spending) and see if you recall more than a few discretionary outlays you still consider worthwhile. In all likelihood, you could’ve had greater financial security and a nice vacation instead!

Still, marketing forces want us to splurge. After all, we (probably) only live once, and life is short, right? In fact millions of people are at risk of depending on public welfare (including, for seniors, whatever geriatric care it’ll pay for). The question is whether society will be willing and able to keep treating people humanely regardless of whether their own mistakes or a combination of setbacks made them poor. So there’s definitely such thing as being too money-casual. But the situation is rarely hopeless.

Beyond the “latte effect”, of cutting out expensive drinks to save money over time, there are usually numerous ways to minimize the spending of dollars that will help generate more cash. In most cases, it takes little sacrifice. Even saving just fifty dollars a week nets over $32,000 a decade averaging 6% growth. If we lack the discipline to carry it further, imagine the lasting memories you could make with that. But if you leave it for another five years, it becomes over $58,000. That’s the power of compounding, where re-invested dividends mean disproportionate growth.

Okay, so what to do? There are some starters that, especially when combined, can yield big returns:

Increasing one’s income is an obvious potential savings boost. Maybe easier said than done if you don’t live in an economically robust area, but many people run a small business for extra earnings (including “retirees” who under-estimate their financial needs). Or work a part-time job. The latter may be a challenge for those who have been out of work for awhile (perhaps excluding mothers of young kids), with few recent references, lost social networks, or a limited skillset for today’s economy.

Even the average worker has had a historic lack of power in the labor market. But at least initially, all this can make a small business more attractive. Depending on relationship dynamics, sometimes a family business is particularly effective at helping to keep money within our circle (a potential financial security plus).

Along the lines of family strength: If applicable, try to raise able, confident, financially-sensible children. Many people find that their finances are impact by helping adult kids (and conversely, many are affected by aging parents who didn’t save enough).

Re-examine your expenditures over a month and consider alternatives. Some general examples:

– Seek discounts, buy from bulk bins (basics like grains and coffee), and use generics where quality is comparable. If you can get more for your money and save even $10 a week, you’re at 20% of the modest weekly savings goal. And get as much as practical out of what you buy, whether a car or groceries. Millions of Americans throw out tons of food, and take on automotive debt every five years. As Stacy Johnson of Money Talks News notes, “paying interest to finance a depreciating asset is not how you get rich. In fact, with the possible exception of gambling, it’s one of the fastest ways to get poor“.

Where possible, and where there’s time, do it yourself (DIY). People often pay for home and auto services that aren’t difficult. Out of practice? Ease back into it! And make home and car maintenance a priority. Otherwise, even bigger expenses creep up on you sooner.

Find cheaper entertainment. Trips to the casino, expensive cable packages, and eating out often are budget killers for those struggling to save. Spending $100 a week on such things = over $50,000 a decade (excluding lifetime earnings on those dollars). For 6 days a week, find something inexpensive to fill free time (some find weekly volunteering a rewarding source of engagement). Cutting that $50K in half, along with the $50 a week savings = over $57,000 a decade. Ask yourself what you could do with that money. Travel? Apply it to an income property or other investments? A guaranteed income annuity …?

Limit the consumption of meat and processed foods. Frequently eating basic but nutritious meals can save money and enhance the enjoyment of finer foods. A few dollars here and there, almost everywhere. That’s one way a portfolio can be built.

If you can tolerate a smaller living space, consider your housing options in retirement. Retirees living in an excessively large house incur an opportunity cost by sitting on equity that could generate income, if they can sell their home in a healthy market and secure new housing at lower total expense (including taxes).

Research medical costs. Most people are led around the system purely by ‘the experts’ (in America, people relying on patient spending for their standard of living). Always shop for estimates, and check periodically for generic drug availability. If you’re on a long-term medication, a brand will cost you dearly over the years (again, time being a big factor).

Take care of your health. It’s your single biggest asset, in terms of how much you enjoy life, what you pay for care, and keeping your options open if you need to earn extra money. A mostly healthy diet, sleeping well, and exercising/moving around become especially important after age 50. So does not stressing over the truly small stuff in everyday life. Cognitive health is important too. Some things that help keep us sharp are exposure to stimulating new ideas/discussions/reading material, and doing/learning new, engaging things. Even watching educational programs, visiting a gallery, mastering a new game, or trying a musical instrument.

All this may not be enough. That’s a risk we take. For many, there’s time to cultivate or extend a preferred lifestyle, but eventually lean living may be the rule. So it’s time to consider the simple things (like spending time outdoors, with friends/with family) that can be enjoyed despite a shortage of disposable income. To do more of the things that bring real memories and true fulfillment. And to avoid taking what we have for granted, because it can slip away.

More Thoughts and Resources to Come…


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