I don’t think personal finance is about deprivation. It’s really about making the choices that will support your highest priorities – the things or activities that will bring you the greatest joy or the deepest satisfaction.
Here is the newest Ask the Expert question from CNN Money
Question: I just turned 24, and the constant pressure from financial advisers to “save save save” for retirement makes me anxious that I’ll never be able to retire. I contribute 10% of my salary to my 401(k) each year – some of which my company matches – and I recently took on a second job to save for a home. Still, I feel miserable. My friends cruise around in BMWs, but I’m afraid to spend a dime on myself lest I ruin my future. I’ve looked at retirement calculators, but most don’t let you enter an age below 25. So I have no idea whether I’m doing enough, too much or just the right amount. What do you think? Are my worries are justified? —Jessica, Boston, Mass.
I read this question, and my first thought was… personal finance shouldn’t make you miserable. (My second thought? Spending money on yourself does NOT equal ruining your future. If that’s true, my road to cat-food retirement is paved with shoes, dresses, and lots and lots of food!)
I hope Jessica knows how well she is doing. She is saving for retirement, AND taking a second job to save even more. But I believe that if something makes you truly miserable (be it a job, a relationship, or a personal finance strategy), you won’t be very successful at it for very long, and that misery will likely poison other aspects of your life.
If your personal finance is making you miserable – some adjustments are in order:
(1) Expectations: If I expect to be driving a BMW at 23, living in a luxury high-rise, and dining at Spago every week, then yes, I might be pretty miserable in my current lifestyle, which includes none of those things. If I compared myself to friends who have a $100K trust fund set aside for them, that comparison probably won’t make me feel any better. In that case, I’d need to adjust my expectations to make sure that they aren’t making me miserable. Expecting to save 50% of your income on $40,000, while living in Manhattan is probably as unwise as expecting to dress head-to-toe in Chanel straight out of college.
(2) Savings rate: When I operated on a fairly strict budget trying to save 40%+ of my gross income every month, I wasn’t very happy and wasn’t very successful at all. Now that I’ve scaled back (and have pledged to make up part of the difference by saving all of my bonuses), I’m much more satisified with my lifestyle. This also means that instead of failing every month to achieve the 40% goal, I’m succeeding fabulously at saving almost a third of my income every month. This principle can be taken too far (how much more successful would I be if I just aimed to save 5% of my income?!). But if I am honest with myself, I know which goals will allow me to prepare for my future AND live well today, and which goals will make me miserable by neglecting quality of life today.
In conclusion? If you are reading this blog, know the importance of saving, and are doing something to prepare for your future? You are already doing well. Make sure that your personal finance reflects your personal situation and priorities, and please, personal finance should be a source of joy in your life (okay, that might be the PF blogger in me talking), not a source of misery and distress.
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Spot on advice!
Regarding Jessica’s letter–some of it reminds me of myself after I got out of school. I expected, for lack of a better term, to be ballin’–my salary was over twice what I made as a grad student. However, I eventually learned the limits of my financial situation, and had to scale back my expectations–I had to figure out what was important to ME on which to spend my money.
So, to Jessica: do you REALLY want a BMW? Or are you just annoyed that you can’t afford one right now? The truth is in those answers.
I agree with Wanda. At 24, you will be in a GREAT financial situation 30 years from now if you save as much as you can. However, who wants 30 years of misery? You gotta live–so find a balance, where you are still saving for retirement but are much, much less miserable. Is being that miserable for years to be able to buy a house worth it to you?
Once you figure out what is most important to you, I have a feeling that if you just loosened up the reins a little bit ($50 a month mandatory fun spending?), you’d enjoy life ALOT more. If that means you delay getting a house for a year or two, come to grips with that. Life is the journey, not the destination…and it’s too short for regrets (have I left out any cliches here? if so, i apologize!).
Jessica is definitely doing great in her savings but she needs to enjoy herself too. In the past I have done two things which some would say wasted a considerable amount of money but brought me a TON of enjoy and I don’t regret them a bit. One was to lease a Mercedes SLK (the 2 door hard top convertible) and the other was to rent a ski condo for a winter (there were five of us in a five bedroom condo).
I absolutely loved that car and had a blast with it. Now when I drive around in my 2004 Saab which I bought used I can enjoy it and not spend every minute wishing I had a fancy car. I kind of got it out of my system.
My ski condo was in Colorado and I was living in Texas at the time so I also bought about 5 plane tickets and would go up there for around ten days at a time and then come back and work seven days straight. (I had a very flexible work schedule). I also bought a season ski pass and a few ski goodies as well.
Yes, I could have saved all that money and I would now have more in my retirement savings but I would not have had those experiences. I also was able to do these things while still contributing to my 401k and paying my bills. No, I didn’t have a huge emergency fund goign at the time, but I survived.
I personally made the right decision for me and wouldn’t trade it for the world. It’s all about balancing.
There are couple of things that came to my mind. The first is that money doesn’t buy happiness. It can buy comfort, but if Jessica is miserable, she needs to identify what is making her miserable, and address that issue directly. The second is that there is no good reason to be a martyr. It is good to be informed. It is good to save money. It is good to be responsible. But you only get one shot at life, so you should enjoy it at least a little. The transition from school to full time adult is a bumpy road for the best of us. Being an adult isn’t nearly as much fun as most of us imagined when we were 11 or 12, and getting up and going to a job every day is very different from school. Is some of Jessica’s misery connected to this? No one knows what is going to happen in the future. No one knows what we’re going to need in 30 years. Maybe it makes sense to put off buying a home. Or just set a limit on the second job – commit to working there for 6 months or a year, put all the money toward buying a house, but know that your life won’t always be working two jobs and not having fun. I would actually say to save 90% for a house downpayment, use 5% for everyday fun stuff, and put 5% in another fund to take a vacation after you quit the second job. It just doesn’t make any sense to be miserable!
I totally get this. Those retirement calculators spit out something like 10 million for me. 10 MILLION?! How am I supposed to do that and eat out?
It was impossible for me if I obsessed about that way huge, scary number. Now that I don’t think about the 10 MILLION, it’s much more chill.
I could not agree more with all the postings here. When I finished school I thought I should be able to afford a lot of nice things too. But you have to pick and choose. Also, I have known many people who looked like they were living “high on the hog” but in reality there were just one layoff away from disaster. And it did happen to them.
Think about whether you want to live “high on the hog” or whether you want to feel secure at night when you sleep – knowing that one big bill is not going to send you over the edge.
I agree with the above posters. I said this phrase to myself several years ago “You can have anything you want, just not everything you want”! I decided that I wanted to go to Europe every year to see my friend, so I kept an older car, bought an 800 sq. ft. condo, brown bagged my lunches, etc. I really enjoy my frugal lifestyle and treat it all as a game. I have never felt deprived because it was always about my choice to live this way, not a necessity. My peers were buying designer clothes, shoes, purses, bigger houses, all the while saying to me “You are so lucky to get to go to Europe every year”! I would just mentally roll my eyes.
I’ll take financial peace of mind over a consumer item any day!
This is absolutely brilliant. Especially
This also means that instead of failing every month to achieve the 40% goal, I’m succeeding fabulously at saving almost a third of my income every month.
I need to work on this. I was stressing because buying my freaking wedding dress was going to bump by savings down to 49.5% (instead of the 50% I’m aiming for). So thank you for saying that!
I actually think your response was better than the “expert’s!”
Jessica is under 25 and that worried about retirement… I think she will retire very rich. At 25 putting 10% into your 401k is fine (and more than most people do). I’m a Financial Advisor, and anyone telling her that she needs to invest more at such a young age is an a$$.
I fully agree that personal finance should not make you miserable. It should be used as a tool to help to accomplish most things you want in life… owning a home, travel, cars, etc.
I think expectations is huge. A friend who recently started a full time job was complaining about how little of his paycheck was left after taxes, insurance, rent, etc. I’m like… duh!
Some friends spend a lot, but I try not to speculate why or how, instead, I focus on my own goals.
This is a fantastic post, and all the comments are great as well. Everyone’s financial situation needs to reflect their on personal habits and what fits them best!
Why in the world would this girl want a car in Boston? Why would you risk ruining a nice car when you’d often need to park on the street, and frequently fight traffic like that?
Jessica’s on the right track and give herself some major credit. I interviewed over a dozen girls when I was roommate hunting around their early to mid 20s – and when I asked if they were saving – most said they haven’t started. And these were girls with a year or two of work experience – most were drowning in student loan and other cc debt.
You also have to be flexible and allow yourself room to breathe. My budget is really tight on 33K a year and for the longest time I wouldn’t allow myself to spend anything or buy the kinds of food I liked to eat. It wasn’t until I rethought my strategy and asked myself what my priorities are did I start to have fun, eat well and live a little.
I agree with what many of the posters have already said, especially with Amy: if you have a specific, short term goal (“reward”) in mind (as well as the longer term goal of retiring), frugality becomes more of a choice and less of a burden. Here are three things I found myself thinking as I read Jessica’s question, things that haven’t been said yet:
1) Jessica needs to get some new friends — people who believe in saving money and living modestly, not in trying to impress others with a BMW. Expand your circle of acquaintances! Comparing yourself to conspicuous consumers when you are a saver will make you miserable any time. I’ll bet at least some of those folks driving flashy cars are already decades deep in debt — not a place Jessica will ever be if she stays on this path. Next time you look at a BMW, Jessica, think, “$500 per month car payment.” It’ll help! And read “The Millionaire Next Door.” It’s an eye-opener.
2) Jessica needs to read some inspirational stories about young people who are savers. Go looking on the internet! This blog is a starting point. Try “An English Major’s Money,” too. And check out stories like this one: http://money.cnn.com/2008/08/15/pf/millionaires.moneymag/index.htm
3) Jessica, if you are 24, you are only one year shy of the lowest age that the online calculators will allow you to enter. Don’t sweat the extra year, just go ahead and use the calculators. The extra year can only work in your favor if you’re already saving!
I think she’s doing fantastic even thinking about retirement at 24! When I got out of school (at 21), I didn’t give a darn! I didn’t get my act together until I was almost 25…
Amy – I like your “game” of frugality. I also try to do that… I make a game of trying to continuously find a cheaper, smarter, better way of doing/buying things, and put the difference towards a “reward” (ie: vacation). The ONLY part other people see is the reward, and make comments like, “You are going away again this winter?!” and here I am, thinking, uh yeah, well, I watched YOU spend your “vacation” money on coffee every day, movie rentals, ridiculously priced non-necessities…. so don’t complain!
Totally a true sentiment (and you wrote it on my birthday, no less!)
I recently had some women comment on a post saying that they were great at budgeting but ran into trouble when friends and relatives invited them out. They didn’t want to disappoint people by saying no.
And I was just so shocked. Because I’d never assumed it was an either/or. There are so many options out there! Some are less frugal than others, but I always thought of financial smarts as a whole spectrum, from miser to spendthrift and everything in between.
Granted, I’m a total knee-jerk saver and my husband mellows me out (and vice versa) because he’s more inclined to spend. This way, I loosen up a bit and enjoy myself a little, and he learns there’s a life beyond spending in the moment.
Sorry that this comment is only mildly related! Here’s a PF question and a situation that makes me miserable:
I’m 25, finished grad school last year, and have a stable job. As of this summer, I finally had a positive net-worth (even including a student loan) and had just started following a reasonable budget, which included saving around $1200/month in addition to 401K contributions.
Then one day, my car was totaled (it wasn’t my fault) when it was rear-ended by a pickup truck. I found myself going from not ever having a car payment (I bought mine used and paid cash) to being forced to buy a car without having too much time to compare models and shop around. In addition, I have to pay my medical bills outright and be reimbursed when I “settle.” (I’m very lucky though that I wasn’t seriously hurt, but man, doctor’s visits, Xrays, and PT are expensive!) The problem is, I’ve used my entire emergency fund to pay for the car!
Has anyone had their lives turned upside down by a situation like this? How do I go on budgeting after this, at least, in the short term when I’m out so much money and every cent is going toward bills? (Wish I could say I didn’t need the car, but my city isn’t public-transportation friendly.)
If nothing else, I hope this comment helps to emphasize that you should NEVER underestimate an emergency fund.
Love the blog…it’s inspiring!
Alex, I don’t have any advice about your current situation, but would like to offer a recommendation to you and other readers.
I strongly advise you to add substantial Med Pay coverage to your auto insurance policy. It tends to be extremely cheap, and if you’re ever in an accident, it will pay for your related health care and other expenses upfront, (even reimbursing you for lost income, I believe.)
I was in an accident a number of years back, and wished I had a higher amount of Med Pay. I later increased it to the maximum amount available and it only increased the premium a few dollars. If I had done it before the accident, it would have saved me a whole lot of money, grief and stress.
It’s especially important if you don’t have health insurance or if you have a high deductible health insurance plan.
By the way, high deductible health insurance plans combined with Health Savings Accounts are another terrific way to save for your future with great tax benefits and to also have more flexibility in your health related spending. They’re especially great for young and healthy people who don’t use medical services very much.
Pay attention to the maternity coverage and factor that in if it’s a likely consideration. Some high deductible plans don’t cover normal delivery and recovery. (Although you can negotiate much lower fees ahead of time with the doctors and hospitals, and use the money you have accumulated in your HSA for expenses.)
Many times you can find a good plan at about a third of the cost of a normal plan, with the difference being deposited to your HSA by yourself or your employer – whoever is paying your premiums now.
See if you employer offers HSAs or set one up for yourself if you’re self employed.