Financial advice often boils down to what steps a person can take to achieve a specific goal. If you want to pay off your student loan debt faster, for example, then advice will detail what specific steps you must take to reduce your discretionary spending and increase your loan payments. Based on that increase, then you can determine how long it will take to pay off the loan.
In practice, though, creating a financial plan and building financial independence requires making choices. Sometimes the choice is obvious, like should you save retirement money in a savings account or an investment portfolio? (If you want the money to grow faster than inflation, then it must go into a mix of stocks and bonds.)
Other times, however, these choices create real-world changes to our well-being, sense of financial security and even impact our attitude towards how we view ourselves. Part of the strategy behind the financial independence retire early (FIRE) movement is removing this focus on money and its impact on our wellbeing to determine where we can spend to produce the most happiness in our life.
For instance, if you love travel, then someone in the FIRE movement would suggest making sure to spend money on travel and cut back on everything else that you can to increase savings rates and budget for more trips.
Such an approach allows one to home in on the areas of our life where the money has the most impact, while saving everything else.
But even if you have gone through this process and cut back significantly, you still may face decisions, which impacts how the money grows and what goals you reach. Here are some common, difficult decisions that when you’re ready to build a financial plan, or in the middle of executing said plan, will face.
Savings versus Paying Debt
There’s good news about the battle between whether you should save more or pay down debt faster. No matter which way you choose, it’s hard to go terribly wrong.
The case for allotting money to savings and investing for retirement has to do with compound interest. The sooner you place money into your retirement account, the greater impact that compounding interest can have over the lifetime. Say you invested $10,000 30 years ago, and never added another dime. With a 6% growth rate and annual compounding, the money would reach $57,400. A large reason for the growth has to do with the compounding of returns over time.
To take advantage of compounding, however, there’s one requirement: Time. Therefore, the need to place the money into the retirement account as early as possible in life creates the tension in this decision process.
Meanwhile, paying down debt also has very significant impact on the ability to save, invest, spend and plan. Having a $500 minimum student loan payment every month can sap resources and limits options when you face financial concerns. This encourages cutting the debt faster.
But if you cut the debt, it means saving less while you do. So, then, how do you choose? Often, it will come down to the interest rate on the debt. If the interest on the debt is less than the expected returns of saving, then you may want to focus on investing as you weigh the two options. For instance, if you have a debt that only has a 4% interest or you can invest money beyond the debt payment into a S&P 500 index fund, which has historic returns after inflation of 7%, then you may consider investing instead of paying down the debt faster. Then again, if you have credit card debt with a 19% annual percentage rate increasing the amount you owe every day, then getting rid of it makes the best financial move.
Of course, many feel the debt will hold you back in other ways, serving as an albatross flying over your head until it’s gone. If that’s how you feel about the debt, then improving your wellbeing can still have value that also compounds over time.
Savings versus Having Fun
One of the most difficult battles you may face in your planning, as well as in your everyday money decisions, is whether to put off fun to save more. There’s a direct correlation to reducing your spending — therefore potentially cutting spending on fun things — to increase the amount of money you can put towards your retirement at the end of each month.
If this battle becomes too difficult, then it’s time to either address what you view as fun or cut back on savings. After all, you don’t want to save for the future by living in misery today.
Instead, turn to the things that truly provide you joy, happiness or whatever emotion has the most meaning to you. What activities stand above everything else in that thought experiment? Spending should continue as needed in this area of your budget.
Now that you know where the spending you should keep resides, where else in your budget could you cut? Does the food delivery five days a week really provide value? What about the magazine subscriptions? Or the luxury vehicle? Cutting back on areas that don’t provide that emotional heft will give you more money for the savings part, without making the battle between fun and savings too difficult.
Time versus Money
What do you worry about more, having enough time to do the things that you want to do or having enough money? According to a recent survey, people are split. TIAA-CREF asked people between the ages of 27 and 75, finding that 55% of respondents were more concerned about running out of time before doing the things that they want to do in life.
On the other hand, 45% said they worried about running out of money to do the things they want.
The split epitomizes the battle you may face in thinking about your goals. You want to make sure you achieve certain goals in life, while it may also take enough funds to do so.
The one positive about those that fear running out of time? Among respondents that had this concern, 45% said that retiring early was a top priority.
Sometimes, attacking your biggest concern is the best way to plan. If fear of losing out on time results in higher savings rates and more robust retirement portfolios, then it’s a concern that can have positive impact on the rest of your life. This makes it a battle worth waging.