Spending Now VS Saving for Retirement

This is one of the quintessential questions of personal finance in my opinion. We are taught from a fairly young age that we need to save for our retirement. Retirement, that magical day when we turn 65 years old and we can all of a sudden stop working and begin enjoying life. The reality is that by the time you turn 65 you can’t do all of the things that you would like to do because of physical limitations – your window of opportunity has either become so small or simply vanished on living your dreams out.

So the quandary remains – do we put our extra money into our retirement funds or do we live our dreams now? Well lets look at a the two extremes:

Spending Now

When it comes to spending now I’m not referring to spending your money on essentials like food and housing; I’m referring to extra money that would normally go into retirement savings. If you were to take that money and buy yourself a fishing boat because you’ve always wanted one and learn to be a great fisherman (which might be a dream of yours). If you get the opportunity to adjust your life so that you’re able to live your dreams sooner rather than later then that’s an amazing thing.

For this to be really worthwhile you need to understand what your dreams are and know how to live them within your means. So for example if you’re able to take 6 months to sail in the Caribbean and have the money to do it then you’re probably ok for spending the money now. If on the other hand you don’t have the money then you’re living your dream at the expense of reality then the credit card bills will catch up and you’ll be in debt with little to show for it.

Saving for Retirement

The other extreme of the argument is you save money all the time and put it away for retirement. Again I’m not referring to being extremely crazy and saving everything just your average amount (maybe a bit more) for retirement. The unfortunate thing about this aspect is you have to wait till your 65 before you can start spending that money and living your dreams. Attached with that is fact that you might not be as spry at 65 than say at 35. But saving for retirement means that you’ll be able to take a few trips here and there have no financial worries and live a nice happy life.

Personally the idea of retirement scares me because I would become bored, I’m always moving around doing things and yes at 65 many of them are still possible but at 75 and 85 most of them aren’t. Buying a new car every year versus a new one every 5 or 6 wouldn’t be a defining point nor a high point of retirement for me. If it is a dream for you to be able to do that then you want to save for retirement.

The optimal solution – Balance

The optimal solution is a little from column A and a little from column B. You can’t ignore retiment because you’ll need to have money for when you’re no longer working full time and on the other hand you don’t want to ignore your dreams and not spend now. The balance is making sure that you live both lives. You spend some money now on living your life but set aside enough money so that when retirement does come you don’t have to worry about not having any money.

Finding what the balance actually is will be a personal choice, for some people their dreams are very physical and they want to accomplish a lot of them before they hit their 40s lets say and for others they might actually be dreams that can start when you’re a little older.

Unfortunately the very first part of this equation is knowing what your dreams are and what your goals are. Until you have those figured out spending now is simply spending without purpose.

Being Frugal doesn’t mean being Cheap

There are times in your life when you really need to tighten your belt and reduce your spending. You need to become very frugal with your money. This is an understandable situation and one that will come up. Some people on the other hand are simply frugal with their money all the time.

Being frugal is a choice, you spend less money, purchase fewer things and in general you’re simply much more conscious of where your money goes. I’ve started becoming more and more frugal since starting this blog; I now fully understand the difference between want and need and I spend accordingly. This doesn’t mean that I discount quality products or the desires to spend on a whim on the odd occasion.

Being cheap on the other hand for me means that you’re resistant to spend money regardless of the reason or the quality of a product. Cheap people avoid spending money at all costs and will go out of their way to not pay for something even if the expense qualifies as a real need. If you’re cheap you won’t spend the money even if you have it!

For me there is a very distinct difference between the two since there will be times in your life where you have to be careful how you spend your money to make sure you don’t go into debt. Or you simply have no way to get any more than you have. Frugality denotes some reasoning behind trying to spend as little as possible. If it happens to be a limitation then its forced but when it’s a goal it’s no different.

Cheapness comes with no reasoning behind the attempt to spend as little as possible. Not spending money for the simple sake of not spending it – purchasing items with the lowest cost regardless of needs, desires and product quality.

If you’re overly cheap this could end up costing you more money in the long run, buying sub par items means they’re more likely to break which will require replacement sooner. For example if you were too cheap to buy a decent used car and bought one for $500 lets say versus one for $5,000 will translate to additional maintenance costs and you’re far more likely to run into an issue which will force you to buy another car. This is without considering the value of your time.

Personally I don’t think I can ever become a cheap person, I value my time and money and if I have to spend more to ensure that in the long run I can save both by spending a little more up front for additional quality then I will (if I have it of course).

Think Small – The Pieces Add Up

If you look at the buildings around you they’re made up of many parts, most of them very small. The tallest skyscrapers are not built out of one large piece of concrete but are built in stages with lots of small amounts of concrete and steel. This simple fact is something that we need to keep in mind when considering many things in life, especially our personal finances.

Personal Finance covers a wide range of topics from debt to investment and for the average person it impacts their whole life. If you’re reading this and are in debt, did you accumulate this debt in one fell swoop? Chances are that you didn’t. Yes there maybe big ticket items that you purchased such as your car or your house but aside from those pretty much everything else is a collection of relatively small items. The $20 you put on your credit card here and there over time added up to the $1,000s that you owe on it now. Thinking small can put something like this into perspective and help you realize where your spending is exceeding your income and what you can do about it.

These small amounts all add up to very large numbers over time. If you were able to save $5 a week on groceries you’d be looking at $260 over the course of the year which could be used to pay down debt or make an investment. Saving $5 a week on something like groceries isn’t a challenge at all. If you’re one of the many people that routinely eat out for lunch then you’ll notice that by the time pay rolls around you’ve spent a lot of money on those lunches, I spend $35-40 a week on lunches for example. Using my example it adds up to over $2,000 a year. My relatively inexpensive $7-8/day lunch quickly adds up to a whopping $2K! I’ve been writing about this topic for over a year now and this example is still staggering for me.

Compound Interest and Saving

Looking at this from the point of view of saving money and compound interest if you’re able to save as little as $50 a month you’ve saved $600 over the year. Continue to do this over a few years and you’ll start noticing the compound interest kick in. At a fairly standard 4% interest you’re making $24 in the first year alone. Again if you continue adding and re-adding these small numbers over the course of a couple years this can add up to very large numbers. If you were to continue to save that $50 per month for 5 years with that 4% compounded annually you’d be looking at $3,379 and by the time year 10 rolled around you’re at $7,491 and you’ve made $129 in interest. Now that kind of money may not be enough to retire on but it’s definitely a perfect example of the power of small numbers.

Breaking Goals Down to manageable chunks

Another way that small numbers work to your advantage is in making the larger sums more manageable. You can take your goal of saving $5,000 which can be daunting for many people and break it down to setting aside a little over $400 a month which is much more reasonable than the initial sum. This applies to most goals that you come up with, breaking them down into manageable chunks means you’ll be better able to reach them.

You can see the power of small numbers all over the place, from business applications to learning languages. Simply keeping this in mind can help you get your spending under control and help you save a sizable chunk of money in the event of an emergency. Getting the large windfall of cash is a great thing but is far less likely than saving $5 a day over the course of a year (which translates to $1,825 over a year).

The Cost of Pet Ownership

My parents recently got a cat from the animal shelter and he’s the cutest thing I’ve seen in a very long time. They’re undoubtedly saving this animal from being put down (especially since he was abandoned) but with something as simple as this comes a cost. Having a pet puts some responsibility on your shoulders and some costs. Most people don’t realize that they’ll have to pay for the animals food and veterinary needs, and if they realize this they don’t realize just how much a vet can cost.

Pet ownership comes with a lot of benefits, animals in our lives make us smile, give us energy and often they can help us get our dose of exercise. The positives of owning a pet such as a cat or a dog are many but they also come with a cost. Say it costs you $20 a month to feed your pet and an additional $200 a year for basic vet fees. Very quickly this pet is a $420 a year animal and more often than naught this is small approximation. Animals have other hidden costs that we forget about (leashes, toys, cat litter, etc.).

The final cost of pet ownership that you need to weigh before you actually get one is the time element. Cats for example are pretty self-sufficient but still need some attention; you need to feed them daily and you need to make sure they have a clean litter box or you might find a surprise waiting for you one day. Dogs need to be walked on a regular basis, which can be great for both the owner and pet but it takes time, which has value.

One last point that I need to mention is the impact to vacations – if you own a pet and you plan on taking a vacation where you can’t take the pet you need to find a way to ensure the animal is being looked after while you’re away, which can cost more money and potential headaches. Owning a pet isn’t like a gadget or toy that you can simply leave for weeks on end it’s a life that needs care.

I’ve had a pet for years, most of my life in fact, and I’ll continue to have one. But I fully realize that this little creature sharing my living space is alive and needs care no different than a child. Anyone considering getting a pet should keep this in mind when getting a pet; the financial impact can be significant even if the emotional benefits are considerable.

Controlling ATM Fees

ATM Machine

ATM Fees have been in the news lately and the Blogosphere (at least the PF one) has been reacting. The Bank of America has raised their ATM fees to $3 which I have to agree is a bit on the excessive side. So why is the reaction so negative? Well first off I think that the other banks out there will follow suit on this and they’ll all be charging this amount soon.

Why is this such a big deal?

Well if you’re like me you look at your bank statement and notice all of the little dings associated with bank fees and ATM fees. It’s one of those hidden costs that no one really thinks about when they’re taking money out of the bank machine. When we step up to an ATM and pull money out it’s because we need it then and there now rather than using another form of paying for our purchases (debit or credit).

How do we control ATM fees?

Very simply either use credit cards, wisely, which can be problematic in it’s own right or we need to learn to control these fees. The simplest way to control them is to carry cash around with you. If you take out some cash when you’re at your bank you can reduce your reliance on other bank’s ATMs. If you know you’re going to need money take some out rather than scramble last minute to find an ATM only to realize later you just paid $3 to take out $20!

Saving money with Cash

I’m sure that there will be people out there that disagree with me when it comes to relying on cash but it can save you some money. If you can reduce the ATM fees that appear on your statements by say 10 ATM fees per month you’ve just saved $15-30 depending on the bank you use. As with most small amounts you can easily neglect this money but if you take it over the longer term it all of a sudden makes a considerable difference. That $15/mo over the course of a year translates to $180 and at $30/mo its $360. Where you might ignore $15 or $30 as a convenience fee the $180 to $360 all of a sudden doesn’t seem that small. By controlling your ATM use you can reduce your debt. If you happen to use an ATM a significant amount this can save you a lot of money.

Carrying cash around brings with it it’s own problems in that people no longer feel safe having $200 in their wallet. Chances are you don’t need quite that much and if you do need the money carry one credit card for the larger purchases. Both cash and credit cards require some self control to ensure you don’t overspend but they’re a much better than paying the banks an excessive fee for a convenience.

I’ve always seen ATM fees as excessive, even at $1 per use I think is a bit much since by volume of use alone the banks are profiting at less than this per transaction. Banks make money hand over fist yet they insist they need to increase fees on basic services. The worst part of this whole equation is the fact that this is going to impact everyone especially people for whom $3 can make a difference when it comes to basic expenses such as food and shelter.

Social Pressures To Spend your Money

From a young age we are conditioned by society to act a certain way. Part of this is the normal aspects of fitting into a society: fighting, theft and vandalism are taught as being socially unacceptable. On the same token we’re conditioned to spend our money a certain way. We are inundated by the media and our peers with all of the things that they spend their money on while at the same time being pressured into a purchase because NOW is the only time we can purchase an item.

When you spend too much money you’re forced to borrow it from somewhere and this comes with a cost, interest. By the time we finish school the pressure to spend has translated into credit cards and fancy items in our homes. Its socially acceptable to be in debt while we go through our daily lives. If this was debt such as a mortgage then I would say this isn’t nearly as much of a problem as it is. But the latest cars, computers, and electronics have little value when it comes to re-sellability.

Yesterday I wrote about accepting financial responsibility for your actions and we’re told that this isn’t important by the media and that we really need to buy the latest Blackberry because Paris Hilton has one. The pressure to keep up with the proverbial Jones’ is in my opinion so strong in our society is hamstrings us financially from a young age. If your neighbor happens to make a lot of money and can reasonably afford a BMW or a Porsche that doesn’t mean you can or should. Unfortunately we are all fixated on status symbols, too fixated because we can’t afford those status symbols.

Succumbing to the social pressures to spend money is something each and every person has to deal with in their own way. I no longer look at what my friends are spending their money on because I can’t afford the big screen TV or take an exclusive trip to Hawaii at the moment. I also don’t look at the media when it comes to the Hollywood stars; they have money to spend without the fear of not having money for food. But that doesn’t mean that I don’t want what both of these groups have or do – I’m just being responsible not to put it on credit when I know I’d have difficulty paying it down. Its not necessarily the most popular choice in my mind but it is unfortunately a necessary one.

Maybe the coverage that the sub-prime mortgage market is getting right now will have an impact on spending. Maybe we’ll start realizing the buying a car that costs as much as a house in some parts of the country might be too much? Then again that would be asking too much.

The 118th Carnival of Personal Finance is up

Golbguru over at The Tao of Making Money is hosting this week’s Carnival of Personal Finance and what a list it is There are 88 entries from over 100 submissions in a variety of different categories. My entry made it into the editor’s choice (Thanks Golb!)

Check out this massive Carnival – it’ll keep you reading until the middle of the week.

Accepting Financial Responsibility

Broken Piggy Bank

As we get older in life we are tasked with more responsibility over our worlds. Whether it’s paying our income taxes or managing our spending habits, growing as individuals requires serious discipline. When we’re children we’re responsible for very little but by the time we’re making money we’ve got obligations and a responsibility to those obligations. Financial responsibility is no different; once we’re at the point in our lives where we’re making money our financial matters are our responsibility. We have to take that responsibility and accept it.

Debt for example doesn’t happen over night, people who find themselves very deep in debt have no one but themselves to blame for their situation. They spent more money than they had or than they made. They were irresponsible and now they struggle. I know I’m one of those people but unlike a lot of people when I’m asked how I got into debt my answer is: “I was stupid with my money” where a lot of people blame this circumstance or another. When it really comes down to it there will be times when you need to spend more money than you have but if you’re not willing to accept the repercussions of your own actions then maybe you shouldn’t be taking them.

Another aspect of the financial responsibility for me is the social pressures to spend. Keeping up with the Jones’ has always been a fact of life but when you’re pressured to keep up with the Hilton’s that’s a completely different story. Regardless of if we like it we’re all influenced by our peers and the media to some extent. We see what those around us have and sometimes we can’t help but want something similar. This is a fact of life and as long as we accept our financial responsibilities and live within our means we’re far less likely to find ourselves in debt to our eyeballs.

Accepting responsibility is hard. Even something as simple as admitting to yourself that you’re the cause of your own financial troubles takes time and a certain amount of bravery. Unfortunately getting into a financial mess is far easier than getting out of one. Knowing just how much you owe banks and other people is a frightening concept because you are forced to admit that you made mistakes and are likely going to make them in the future. Without accepting responsibility for your actions and yourself you’re never going to be able to get out of debt and into a situation where you don’t have to keep up with the Jones’ on debt but with excess money.

Taking the lazy way out by floating along and not accepting financial responsibility for your actions is foolhardy and you’re left with no one but yourself to blame. Circumstances will come up that will force you to spend money you don’t have, deal with it! Living in fear of your debts is not a way to live; I know I’ve been in that situation. I’ve accepted that I’m bad with my money and this blog is partially to help me keep myself in check. I’m using the experiences of other personal finance bloggers to accept responsibility for my spending and to improve it.

Accepting the issue is the very first step to being able to fix it.

Site Housekeeping

For those of you that are observant I’ve made some modifications to the site over the past couple days and weeks. Most of them have been rather minor since I actually like the overall format of the site. More changes will be occurring over the next few days and weeks as I incorporate them.

As part of the maintenance on this site I’m going to be going through my links and removing those that are no longer active. At the same time if anyone is looking for a little link love please send me an email and I’d be happy to add you to my list.

Asking for Discounts

I ran across a post on I’ve Paid Twice For This where she mentions asking for a discounted price and gives a couple examples. This really got me thinking because our society is so conditioned to accept things at face value that we simply don’t ask questions anymore. Personally I think this has a lot to do with fear of rejection and fear of standing out but that is a topic for a completely different type of Blog.

Asking for a discount doesn’t hurt and about the only thing that can happen is positive so why don’t we do it? Normally I don’t ask for discounts; but whenever my purchase gets a little more expensive I don’t hesitate. Take hotel rooms for example if you stay in a hotel room once a month and pay $150 for it, that’s a lot of money. Asking for a discount can very easily get you 10% off that price which translates to $15. Over the course of the year that’s $180, which is more than a full stay!

Getting over the fear of asking for something where the answer might be no is something that a lot of people have difficulty with. We’re too used to following along and accepting the price for something as is. Discounts exist all over the place as sale prices, volume discounts, promotional prices, and discretional discounts. If you’re asking for a discount at a hotel chances are the clerk has the authority to give you a discount without any need for an approval.

If you can get 10% off the purchase price of your items you can save a great deal of money over the long run. It might only be a couple dollars here and there but when you add all of them up it makes a difference.

Many people go out of their way to find sale prices but are too afraid to ask in the store, next time you’re about to buy something, get out of your comfort zone and ask if they have any discounts, you might need to be creative with your reasoning why but very often the competition will have a better price… threaten to take your business elsewhere. If it doesn’t work then you loose nothing.