Here is another post from Ryan and all about his favorite topic: finance.
Saving money is all about delaying gratification today for a (hopefully larger) benefit in the future. But this is very difficult to do, particularly in our consumption driven culture (almost 70% of the United States GDP growth is driven by consumer spending). Goals like saving for retirement can seem too abstract because they are so far off and seem so unreachable early in your career. So let me propose another reason to save and get your financial life in order that is hopefully less abstract and more near term beneficial: optionality.
What do I mean by optionality? To me, optionality is the ability to do whatever you want without having to worry about money getting in the way. This may be a very ambitious goal (and one I’m nowhere near achieving) but is something you can work towards that has more near term benefits. Some might call this “financial independence” but my idea of optionality is less about being fully financially independent and more about being less weighed down by the fixed expenses in order to have more options available.
Let me try to explain with a “completely hypothetical” 😉 example. Let’s say you’re deciding which school you want to send your 4 year old daughter to for kindergarten. There are a few options to consider that are public (one of which requires a lottery, which the chances of winning are low) and a private school. Without some level of cash flow available, the private school may not even be an option. However, with a big enough cash flow buffer each month, the private school is now in the consideration set. This makes me the “hypothetical person” feel fully in control of his or her decision and able to make the best decision regardless of the cost.
Optionality has other benefits as well. Let’s say you find a great deal on a trip or item you’ve been eyeing for a while, you will easily be able to jump on the deal while not adding to credit card debt. Also, if you are sick of your career but have a cash flow buffer each month, you could take a new job or change careers and even take a pay cut if necessary. Also, I think you will be able to take more risks at your current job in decision making and new ideas (which could pay off in the long run – more risk, more reward).
So how does a person achieve this level of optionality? I believe the key is limiting fixed expenses (think mortgages or rent, other loan payments, monthly subscriptions, etc.) relative to income as much as possible. Variable expenses are much easier to cut in rough times if needed. There is a minimum level of variable expenses (food, utilities, etc.) that are required for daily life but most others can be immediately cut or greatly reduced if required. Heck, even if you send your child to private school and money is too tight, you could move back to public school if necessary. If your mortgage payment is too high, moving homes is much more difficult.
So, how can you get started on the path towards optionality? You can start by working to pay off debt (more on that in a future post) or make other lifestyle changes in the short run to reduce some of your fixed expenses. This could include cancelling a cable subscription or gym membership, putting off a new car purchase or buying a used car with cash, or even something as extreme as moving to cheaper housing if possible. Some of these changes are more difficult than others but the reward in the long run will be worth the short term sacrifice.
Delaying gratification will always be a challenge for those who are new to saving. But if you think of your reward as having more “options” in your near term decisions rather than saving for something 30+ years away, I believe you will have increased motivation to save.
What do you think are some of the other benefits for having a healthy financial life?
