Or, how does lifestyle affect our finances? Musings of things swirling in my head today…
1. Take charge of your finances:
Watch your income and expenses, take time to learn about the components of a financial life: budgeting, saving, investing, insurance, taxes, retirement, and estate planning.
2. Understand the concept of opportunity cost:
If you spend money on one thing you don’t have it to spend on something else. You are making a choice every time you spend money; it is a vote for rent, student loan, car payment, entertainment, clothes, et cetera.
3. Be aware of the lifestyle you choose, as it will have long term financial consequences:
How much you pay for big budget items like housing, transportation, food, and health care is going to affect what is left over for other items like travel, entertainment, clothes, donations, savings, and investments. This may seem obvious, but it can be overlooked. In the book, The Millionaire Next Door, the authors cite examples of doctors and lawyers who drive fancy cars and live in big homes, but have low net worth, they don’t have much in the way of financial assets versus the janitorial business owner who drives a 2008 Honda Accord and lives in a comfortable, but not extravagant house, and has a high net worth of stocks, bonds, and cash. The business owner has not had the trappings of an affluent lifestyle and has amassed wealth.
So, your lifestyle consists of the neighborhood you live in, the size of your house or apartment, the kind of car you drive, the type of clothes you wear, the style of vacations you take, and the kind of food you eat (prepared at home or eaten out). Your lifestyle will depend on if you are married or single, have kids or don’t have kids, and your health. Do you exercise, eat healthfully, manage your stress, see a doctor for checkups? All of these areas are going to impact your spending, either in the short run or long run.
For young adults just starting out, I like to recommend that they keep living the student lifestyle once they start working….keep driving the old car, scout around for free things to do and find free food for Happy Hour. Do that for the first couple of years and they should be able to start that emergency fund and pay down some student debt.
For those contemplating retirement, if money looks tight, think about where you can move to that will reduce your housing costs. Can you manage on one car versus two?
For those in the middle of your spending years, if you know you are on track for your goals – great job! If you know you need to be saving more or paying off debt, look at the various aspects of your lifestyle that may be tweaked or overhauled to free up more cash. As always, if you need some help to get on track, please give us a call!