“In a world dominated by social media, it’s important to remember image isn’t everything.” –Your Dollars, Our Sense
Everyday we are constantly bombarded with other people’s lives, their successes and triumphs loudly displayed for the world to see. And while it is nice hearing about other people’s achievements, more often than not it causes some semblance of self-doubt within us. Why haven’t I been able to take a fancy Europe trip? Should I also buy a new car? While it is easy to fall down this rabbit-hole of comparison to others’ lives, it is important to remember that when it comes to your personal finances, image isn’t everything.
While Sally from High School is busy posting all about her Italian vacation on Facebook, you should take the time and make sure you have hit your fiscally responsible goals before you attempt to take on a flashy trip of your own, especially if it is outside your means.
- Understanding the Essentials
Considering expenses you have in order to get through the day-to-day of life should be your top priority. Making sure that you have enough money to cover housing, insurance, utilities, food, etc. is vital, and you don’t want to be living paycheck to paycheck because you decided to spring for a new car without really looking at your financial picture. Typically, it is recommended that you allot 50% of your paycheck to these essentials before looking to spend your hard-earned dollars on anything else that you may want. If you need some extra guidance, this video outlines an easy rule of thumb for balancing spending and saving.
- Non-Negotiable Expenses
Once you have covered the essentials, you should look to what we refer to as “non-negotiables.” Some of the most important non-negotiables include paying off bad debt or college loans. Other non-negotiables could be anything from establishing an emergency fund, saving for retirement or term insurance. These are expenses that you should still prioritize and will help you in the long run if you take the time to build them up.
- The “Others”
After you have figured out your essential expenses along with your non-negotiable expenses, you now have room to look at the “other stuff” that you may want to be spending money on. This is an area that you should tread lightly. “Other stuff” might include saving for college, buying a second home or retiring even earlier. Or it could mean finally purchasing that new car or being one of the first to buy the latest iPhone.
While you may think that the rest of this money can be thrown at fun and more adventurous things, the “other stuff” can come with a trade-off. The key is identifying your true priorities and being willing to give up something in the future, for the sake of having another thing now and having that perfect image.
Let’s look at an example:
You decide to buy a new car, a Range Rover (RR) complete with all the bells and whistles. You have covered all your essential and non-negotiable expenses and still have room for this fun expense. While you have been dying to drive around town in your shiny new ride, buying this new car now may mean that you have to delay your retirement by two years. Assuming the same down payment, term and rate on the RR versus say, the Acura MDX, the monthly payment on the RR is almost double that of the MDX. Basically, the RR payment could represent additional $$$ per month being taken away from retirement. All other things being equal, for the average adult, missed savings can mean working additional years to reach retirement.
It’s a harsh but often true reality, and these “other” expenses will likely require you to do some soul searching in deciding what is best for you and make sure that they align with your financial priorities.
Let us be clear, the purpose of this article isn’t to talk you out of your financial dreams. It is a great thing to treat yourself when the timing is right, and when you have the opportunity to do so. Rather, we want to make the point that certain financial decisions require a great deal of thought, compromise and introspection as they relate to your priorities and it is best not to jump into anything without thoughtfully mapping it out.
Take a moment to make sure you have all your bases covered when it comes to the essentials and non-negotiables. If you do, let your discretionary thoughts run wild with the potential uses for your extra income. Then consult a professional (and your spouse, of course) before making any final decisions.
Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.
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