Do I Go On Vacation… Or Save More for Retirement?
Money is a funny thing. On the one hand, many people feel stress and fear about their financial future; on the other, we collectively tend to spend and splurge on decidedly short-term pleasures.
Two studies, both published around the same time in 2014, illustrate the point.
An American Psychological Association survey found that money was the leading source of stress among survey respondents. But an Edward Jones study released around the same time found that, among financial topics, more people prioritized their vacation over their retirement planning.
Are we really so bad at this?
On an intellectual level, this doesn’t make any sense, but you can probably relate to it on an emotional one.
Retirement planning is a big and somewhat intimidating issue, with benefits that you’ll only see several decades down the line. And with all this financial stress, who couldn’t use a decent vacation?
But the reality is this: if you want to build a future of financial independence, you need to have a plan. Prioritizing vacations and retirement savings is part of it.
Here’s how to get started.
Run the numbers
One of the best ways to give yourself a serious reality check is to actually think about how much your lifestyle is costing you.
Consider these questions:
- How much income do you need to maintain your current lifestyle?
- Are you in debt – and are you working on paying it down?
- How will eliminating debt affect your income needs?
Now, consider this: as of 2015, the average 65-year old can expect to live for another 20 years. That’s an average. About 25% of 65-year olds will live past age 90, and 10% past age 95.
In other words, retirements are long these days – and almost certainly getting longer. Financing a lengthy golden years might come from a variety of sources, including your savings, Social Security, and even your home, but the reality for most workers is that you’ll be responsible for much of your financial security.
So, take your current income requirement and run the numbers: how much money would it take to have 20 years worth of savings? Thirty years?
Going from that number to a savings rate takes a little more legwork, but you get the idea: it’s not an insignificant issue. (To learn more about finding the right savings rate for you, be sure to download our free retirement workbook series!)
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Build out your priorities
One way to think about your financial priorities is to organize them into tiers. Here’s one approach:
- The basics.
These are the issues that are going to have the biggest impact on your financial stability over time: high-interest debt, like credit cards, and emergency savings to finance life’s ups and downs are the most notable examples.
- Long-range goals.
The next tier is long-range financial health. These are the prudent financial decisions you make to build a better tomorrow. Retirement savings, a deposit for a home, and children’s college funds should go here.
- The fun stuff.
This is the stuff that makes life more fun: vacations, eating out, new clothes, and other treats. For most people, it’s at the top of the list: for financially-savvy wealth-builders, it often comes last.
How to balance your finances across these tiers is a personal issue, but it’s generally advisable to pay down high-interest debts and build a basic emergency fund first, before moving onto other goals.
From there, you can start to divide your resources among short-term pleasures and long-term plans.
The important thing is to find a balance: you don’t want to shortchange your retirement savings in favor of plane tickets, but you might also find that travel brings meaning to your life and helps make it easier to stay on the ball.
The key? Figure out what pleasures are the most rewarding, and prioritize those by cutting back on non-essential treats. If you love travel but eat out every day, consider redirecting that lunch money to a travel account – just make sure you’re also doing what you can to finance your long-term goals.
Make it immediate
There was an amazing study conducted many years ago, in which some people had to make financial decisions while looking at sketches of themselves as retirees, while others made the decisions on an otherwise blank computer screen.
The result? People who looked at the older versions of themselves made more prudent financial decisions.
It worked because the pictures humanized the decision-making process. Looking at yourself as an older person can help you realize that you’re going to need the same things 20, 30, or 40 years down the line that you do today.
So, when the going gets tough, try to put yourself in your own shoes – a few decades from now. Think about how you want to live, where you want to live, and what you want to do with your time. Consider how stressful it would be to be in debt, or how worried you might be if you had to retire early due to a sudden illness.
Humanize yourself, and let that help guide your decisions.
Ready to get started?
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