Where is the balance?

[mrpaseo]

I'm sure it is different for everyone but how do we figure out where our balance is?

Allow me to clear up my question:
Let's assume I have an annual income of $30,000. My household bills are minimized (As you all have helped me do) and cost exactly $2,000 a month ($24,000 a year). That leaves me a savings surplus of $6000.

Keep in mind, this $24,000 is bare minimum to live (In accordance to my life, I know it is different for everyone).

So, I have $6000 a year to save or $500 a month surplus. If I do this for the rest of my life, I should be set right? But for the rest of my life I live a "Just getting by, paycheck to paycheck" life. No one wants to live like this if they don't have to, and since I have $6000 surplus ($500 a month) I don't have to so... I decide to add a little to my "Luxury" expenditures. I decide to spend an extra $100 a month (Only 25 a week) in my entertainment fund. Just enough for a few niceties.

Here is the dilemma. If I do the math, I find that saving $500 a month for say 40 years earning a modest 4% I will earn approximately $592,989.22 but I will live a meek life.

If I save $400 a month for the same 40 years earning the same 4% I will have $474,367.37

A difference of $118,621.85... lost if I spend only $100 more per month...

This leads me back to my question... Where is the balance? Let's assume I am willing to sacrifice the future $118,500 for my $25 dollars a week. I guess this would be considered my "Balance". That is if I am willing to "Retire" on the $474,000.

I guess I am answering my own question here....

First we would have to determine what I would feel comfortable retiring with (Amount of cash).

Then determine a way to save that amount at the time that I want to retire.

Then, any surplus monies that I earn would be my "extra" spending money.

Your thoughts?
Ray

[bjl584]

Life is about balance. I don't want to blow every dime I make on things that I probably don't need, but I don't want to save so much that I live a bare-bones existence. I struggled with that for a while. I found that I could easily save 20% of my income and still pretty much be happy and do all of the things that I wanted to do. As that number started to approach 30% I felt a bit deprived. So I settled at around 25% for now. That number seems to work for me. I get to live life today, and I am saving plenty for later in life.

[Mr Nice Guy]

It sounds like your financial defense is rockin, now work on your offense(increasing income.) You also need to factor in inflation into the picture at some point as well.

Pick up a side gig of some sort to make that extra benjamin every week.

[Nobulladvisor]

I'm sure it is different for everyone but how do we figure out where our balance is?

Allow me to clear up my question:
Let's assume I have an annual income of $30,000. My household bills are minimized (As you all have helped me do) and cost exactly $2,000 a month ($24,000 a year). That leaves me a savings surplus of $6000.

Keep in mind, this $24,000 is bare minimum to live (In accordance to my life, I know it is different for everyone).

So, I have $6000 a year to save or $500 a month surplus. If I do this for the rest of my life, I should be set right? But for the rest of my life I live a "Just getting by, paycheck to paycheck" life. No one wants to live like this if they don't have

mrpaseo,

How old are you?

I'm going to assume you are young.

I see two problems.

1. you are not calculating inflation. your income and your expenses will rise over time. well.... expenses will for sure, hopefully your income will rise as well.

2. Never settle for a mediocre life. If 30K a year is not good enough for you, reach higher. Invest in yourself to get a better career or build a business.

[jteezie]

I think your calculations are appropriate since you are being very conservative and simplifying the model. We can remove inflation and raises from the equation, thus these are inflation adjusted numbers, which is appropriate.

I will make a few assumptions:
You are 27, retiring at 67.
You will live through 90
4 percent real rate of return (your dollars are increasing 4% a year adjusted for inflation)

$500k is quite a bit of money if you think about it.
At 2% return, 23 years, $474K starting, amortized to 0 by age 90. That is 27k a year tax free.
27k tax free, adjusted for tax rates = 35k annual income. So you are actually not that bad off.
Also, don't forget that you will get social security at age 67.

So, you can probably enjoy life a little more now if you wanted.

However, lets step back from your model and consider other possibilities because there isn't just 1 way to plan.

-You could try to save really really heavily up front, which reduces how much you have to save later. This is my preferred strategy because once I hit a certain threshold, I can stop investing and will have lots of extra money freed up so I won't have to live the "meek" life. Additionally, saving a lot upfront creates more opportunities to spend later. More practically, is it more worthwhile for you to spend $25/week or $5k once per year (maybe 2.5k x twice a year, etc.) on something bigger and possibly more worthwhile?

-You can change your assumptions. My above analysis took your assumptions, but if I used my assumptions (given your timeframe and risk profile), at 6k a year contributions over 40 years, you could have up to $1mn, but more likely around 750k. Also, is the 30k take home? If it's before taxes, your numbers don't make sense.

-Your income and life situation will change and likely improve unless you absolutely plan to never improve in your career. Expect your income to double over the next 10 years or so before it levels off.
-Even thought he numbers aren't terrible, you should try to boost your income.

[GREENBACK]

My personal opinion is that you equate money with quality of life. Certainly money allows you to do certain things but when you examine yourself and everything around you, you often discover that happiness isn't neccesarily attached to how much you spend.

Balance comes with time. Don't try to save every dime now. Set a reasonable rate that you feel comfortable with and test the waters to see if you want to save more at some point. If that isn't comfortable then back off. At some point you'll know how much you want to save. You may decide you want to spend a little more or a little less. Maybe you'll work longer. Maybe you'll focus on retirng early.

I wouldn't focus to hard on living on the bare minimum. That has a tendency to backfire on people who suddenly realize how much they've deprived themselves of living for the day.

[MonkeyMama]

Two thoughts:

1 - Most people will have far more options than the 2 scenarios you give. The more you are willing to think outside the box, the more options you probably have. Example? Find more income and/or cut expenses. Maybe a degree will pay you significantly more for basically the same work. Maybe moving to another state or city will help you save living expenses. Outside the box? I earned $4000 in credit card rewards this year, for virtually doing nothing. This means, more income without any substantial effort. We have also done a lower-cost-of-living move, BUT choose to stay in a perceived "high cost area" because education is plentiful, good and cheap, and we can spend weekends doing mini-vacations close to home (snow, desert, mountains, ocean - you name it - just a short drive). Just as some examples. Wages are also on the high side here, which just means much more opportunity to earn more.

2 - I like Greenback's comments. I was kind of thinking, "What does spending money have to do with happiness?" OF course, this is assuming basic needs are met. One thing that helps here is just perspective. If those are really one's only options, one will probably feel very discontent if they are focusing on material things and hanging around wealthier people. Giving time to charity and getting involved with the poor would no doubt change your perspective. As would focusing on being thankful for food, shelter, health, etc. OF course, love, laughter, and friends are all pretty good stuff and that is free. I've personally got some nice material things, too, but those things don't mean quite as much to me.

I think this was a hypothetical question, by the way. I think MrPaseo is retiring or just retired (from other posts), and maybe looking for balance during this life change. Sometimes it just takes some trial and error until you figure out what works for you. & clearly the less options you have, the harder it will be to find balance.

[photo]

My personal opinion is that you equate money with quality of life.

That's a great way to look at it. Certainly, we're all more comfortable with a roof over our heads as opposed to living on the street, but what difference does it really make whether you're wearing underwear from a discount store or exclusive lingerie from a designer?

Some of the best advice I've ever heard is to only spend money on essentials (and keep the costs down as much as possible, such as maintaining the thermostat low in winter) and only spend money on non-essentials that make a huge difference in your life.

[mrpaseo]

Two thoughts:

I think this was a hypothetical question, by the way. I think MrPaseo is retiring or just retired (from other posts), and maybe looking for balance during this life change. Sometimes it just takes some trial and error until you figure out what works for you. & clearly the less options you have, the harder it will be to find balance.

You are correct MonkeyMama, I will be retiring next year and this was hypothetical Though I have always thought about this. I have not "Saved" like the average person things. Rather than saving a bunch of money, I chose to pay down debt and attempt to retire debt free.

Thank you all for your responses though.
Ray