Finding the Balance between Lifestyle and Long-Term Goals

Financial Autonomy - Blog
Finding the Balance between Lifestyle and Long-Term Goals

The goal of this podcast and the work we do with many of you one on one in our financial planning relationship, is to help you gain choice in life. This goal implies at its heart that having choice is a good thing, and in the context it’s intended, such as having the choice to leave a job that is making you miserable, or the choice to take your kids to Disneyland, that is certainly the case.

But there are other more challenging financial choices that we all must make on a daily basis. Largely these involve finding a balance between enjoying life today, having that wonderful lifestyle, versus the delayed gratification of saving and investing to achieve bigger, long-term goals.

The idea of balance here is really important. Focusing entirely on one over the other just won’t work. There’s no point living a miserable life today so that you can achieve, for instance, an early retirement goal, because who’s to know how your health plays out, what happens with your relationships, and given what we’ve experienced in recent years, what the world throws at us too. Likewise, and perhaps more commonly, living entirely in the here and now and putting nothing aside for the future is ultimately a source of financial stress and anxiety when, somewhere in your 40s or 50s you come to realise that you’re in a precarious financial position, just a redundancy away from not being able to pay the rent.

So how can you find the right balance? To be clear, there is no single right answer, the answer is different for us all. But let’s spend the next little while looking at a few ways you can think through what’s the appropriate solution for you.


The Importance of Setting Long-Term Goals


Implicit in this wrestle between spending on today versus setting aside for the future, is an assumption that you have some future goals in mind. For many of us those long term goals might be quite fuzzy and nebulous. Retire one day, be comfortable, perhaps own a house.

Can I suggest that if you’re wrestling with finding this balance, step one is to spend some time getting greater clarity on what it is that your long-term goals are. Go down to the park or your local coffee shop with a notebook and think through how you want life to look 20 or 30 years from now. If you have a partner, do this together. There’s no need to be too specific here and of course it can change, but it can be hard to decide against spending money for lifestyle reasons now, if you can’t see the point of that denial. In contrast, it’s much easier to skip some takeaways for homecooked alternatives when you know that by doing so, you’ll be able to afford some fantastic overseas trip in the future, or own your home debt free.

The High Income Trap


We work with a range of clients, but most commonly household income is above $200,000 per year. This is a relatively high level of income and we find that people in this area can fall into a trap where the expectation that their income will always be high means that they feel they can put off doing the financially prudent things for their long term financial security. There’s perhaps sense of entitlement around living an affluent life, or perhaps it might be driven by social pressure to keep up with those around you. This problem might look like significant spending on cocktail bars and restaurant meals, frequent overseas trips, perhaps even flying business class when economy would have sufficed, and renting a high end apartment, or house in a high status suburb.

This mindset can set you on the hamster wheel of keeping up with the Joneses. You need the expensive European car, and heaven forbid it’s more than three years old. Of course there’s the kids private school fees, and the beach house over the summer break, which you can’t afford to actually own, so you pay a fortune in rent. The kids get used to this lifestyle, so they are expensive to keep too. I remember working briefly with someone who was a barrister earning a very high income, yet when we looked at their balance sheet it was absolutely dreadful. Their spending was just incredible. The children, who were actually young adults, had no restraint whatsoever, they just racked everything up on the credit card. The husband was in his 50s and it was starting to dawn on him that on their current trajectory he’d be working into his 80s. This is an extreme example of the high income trap.


Cashflow Management


Cash flow management is something I often talk about on the podcast. As regular listeners will know, I’m not a believer in detailed budgeting and tracking every cent you spend. But if we are to find this balance between lifestyle spending and long term goals, a key element is having some sort of mechanism by which you can ensure that your expenses are less than your income. The bucket strategy is the most popular of the cash flow management approaches but there are many others. I cover several in my book, Financial Autonomy – the money book that gives you choice , so if this is something that you don’t currently have under control, or you feel that your current approach is not working as well as it could, you might want to check that out. As well as the normal hard copy and digital editions there’s also an audiobook version, which I know a lot of podcast listeners enjoy.


The Role of an Emergency Fund


An emergency fund is definitely something worth building into your financial plan. The usual guide is that this should be somewhere between three and six months’ worth of after tax income. Your emergency fund should be readily available cash. If you’ve got a mortgage, potentially this sits in the offset account.

Your emergency fund provides the buffer for when significant unexpected expenses arrive. Examples might be expensive car repairs or the need for a new fridge. For those with family overseas it could be the emergency dash back home when a loved one has a health scare.

Those without an emergency fund can hit the credit card in these sort of instances, then battle to get their head back above water for months or years. Alternatively, in the context of this post about striking the balance between lifestyle spending and long term goals, lacking an emergency fund could mean selling investments that were intended for the achievement of long term goals. Selling down $5,000 worth of shares to fund some major car repairs will have a significant impact on your financial options 20 years down the road due to the impact of compounding. $5,000 today is the equivalent of around $30,000 twenty years from now, a sum that perhaps could have financed a fantastic overseas trip upon retirement.


How does Investing fit in?


So how does investing fit in to this balancing act? You’ve got some clarity on long term goals. And you’ve got a functioning cash flow management strategy in place such that every month the money you have coming in is more then you’re living costs, therefore providing a surplus. Initially you build up this surplus cash to establish your emergency fund, but once that’s done, what’s next?

Well as you can probably guess, investing is the next stop on your journey. Shares, property, bonds, diversified funds, there’s plenty of options, each with their own pros and cons. Putting your savings to work, and enjoying the wonder that is compounding, is an essential piece in securing your long-term future, giving you choice and financial independence.


Financial Safety Net


You’ve got your emergency fund, but that alone can’t protect you from some of life’s rare but potentially very significant curveballs. Perhaps it’s a stroke or heart attack, or maybe a mental illness means you’re unable to work for an extended period of time.

Having appropriate personal insurance in place to provide you with a financial safety net is another important piece of the puzzle. With this cover in place, your long term goals will not be jeopardised in the face of a significant health issue.

Insurance isn’t free of course, so when we’re talking through appropriate insurance with our clients it’s always about finding that balance between having enough insurance, but no more than is warranted. An insurance payout is not intended as a lottery winning. There needs to be just enough cover to ensure that you can get back on track, and you’re not forever knocked off your path.


The Gold in Delayed Gratification


When considering this balance between spending money and having fun now, versus providing for longer term goals, what we’re really talking about here is delayed gratification. Interestingly academic research on delayed gratification consistently finds that our happiness is far greater when we achieve a goal worked towards over an extended period of time, in comparison to a short term sugar hit.

We’re talking about balance here so I’m certainly not suggesting that spending on the things that derive short term happiness should be completely curtailed. But it is the case that if you set yourself a goal, then steadily work towards that goal over time, a few short term sacrifices made to make this possible will be completely forgotten in the satisfaction and joy you’ll experience in having achieved that more difficult and challenging goal that you set yourself some time back.

If you’re struggling with reigning in your short term spending so as to provide for long term goals, perhaps switching mindset from one of deprivation in not having fun now, to envisaging how much fun it will be to do that big trip in Europe, or how much happier you will be when you can leave your current high stress job and work in a space that fills you with joy. Delayed gratification can produce a lot of happiness for you.


The Value of Professional Financial Advice


Perhaps you need help in finding or prioritising your long term goals. Maybe you’ve got these sorted, but the investment piece has you frozen in indecision. Consider whether obtaining professional financial advice might be of value to you. Now of course I’m biased here. As you know financial planning advice is my professional calling, it’s how I provide for my family, and it’s something that I know, through working with clients over many years, can be of huge value to people willing to take advice and work with an advisor over time.

If you’re struggling with finding the balance between lifestyle spending and long-term goals, consider whether now is the time to commence a financial planning relationship.

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