April 13, 2011, 5:00 am

Spending or Saving? How to Balance Money Management With Your Life

by: The Financial Blogger    Category: Pay off your Debts,Personal Finance
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bucketHmm… just writing the title and thinking about the topic tells me that it’s a one to write about!

Should you spend and enjoy life right now?

Should you pay off your debts and save money for your retirement?

What if you die at 45 and never had one great trip in your life?

What if you die at 95, starving in a small apartment for the past 35 years since you hadn’t saved a penny?

How do you balance spending now and saving for later?

First off, am I the right person to tell you anything about this topic? Since 2008, I have increased my debt faster than the Canadian Government. While my assets and my income are growing even faster, I’m not sure that I am managing my budget right now. I spoke of this issue recently in my net worth update; I’m having a hard time managing my bi-weekly paycheck while I am receive 30% of my annual income in a bi-annual bonus. This causes an obvious challenge to balance a budget throughout the year. But in the end, I always payback my debt… go figure!

Spending Vs Saving; it’s all about risk management!

Some will tell you that you are better off spending all your money as you earn it and enjoy life as they know someone who passed away too young to enjoy life. Others will tell you  to live a simple life, pay off your debts and that you will have all the time in the world to enjoy your retirement once you are there.

I think the first group of people is not thinking enough about tomorrow, but they are surely enjoying life to its maximum right now. The latter will never enjoy their retirement. In fact, most of them will continue to save money and live a simple (and perhaps boring) life. After so many years of restraint, it becomes a habit. And many people that are used to this lifestyle and feel uncomfortable when they spend money. So there is no right answer; it’s all about risk management.

Do you want to take the risk of not having enough money at retirement versus taking the risk of never using your hard earned money? This is the right question.

So Where is the balance? The balance is in the bucket!

I think the balance is found when you are able to create a bucket for each goal. At first, you can start with a simple structure of 2 buckets:

Bucket A: Having fun

Bucket B: Saving money for later

The point is to setup bucket B pretty soon:

– establish automatic payments on all your debts (to make sure you pay everything according to the plan).

– establish an automatic investment plan for your retirement account (pay yourself first).

– take out life, disability and critical illness insurance (protect your biggest asset: YOU!)

Then, should you have enough money left over to fund bucket A, have fun:

– extra spending (dining out, clothing, traveling)

– extra (controlled) debt (remortgage for renovation, car loan, etc.)

Bucket A should be a lot smaller and not as restricting as bucket B (which is a major problem for most people; they spend more on hobbies and extra debt than on their house payment and retirement investment account!).

When I look at my situation; my bucket B is pretty solid:

– I have maximized my RRSP contribution (and continue to do so each year)

– I have a solid pension plan

– I have a set payments on my car loan and my mortgage (and I don’t plan on changing cars for the next 5 years or more).

Then, I can play with my bucket A:

– spending on vacation with the kids, clothing budget is on the kids too!

– extra debt to finance my central A/C

My only problem is my credit card debt repayment (which is being done with my variable income). Since 2008, my things have gone a bit sideways but now that I am well established, I’ll have to increase my bucket B and start paying them off within my monthly budget and not wait for my performance at work to use my bonus!

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Comments

Good article. I don’t budget that same way rather I picked an arbitrary number that I wanted to spend in a month (it’s $300). From there I tracked all my expenses and always try to stay below that number (it rarely if ever happens). Knowing how much I can spend has limited some activities but you don’t always have to spend money to have fun. For example walking through a park with a significant other or playing a sport.

-Ravi Gupta

The more I think, the more I like spending. Saving is deadening to the spirit! You see that with all the extreme saver blogs out there. Saving too much until you can’t live a life anymore is boring. Do what you do: Earn more money! Live a reasonable life and focus in creating new wealth.

You’re a good example!

I save for retirement first and live off the remainder. Every other year, we take a major trip and in between a smaller vacation. It is one of the rewards of good fiscal management!

I auto deduct into 401k first and then the left over goes into the budget. It’s hard to balance A and B, but I think it’s better to err on the side of caution and save more for retirement. I would hate to be retired and not have enough saving.
We were pretty lucky to have dual income and no kid for 15 years and we were able to take international trips almost every year. Now that we have a kid though, we’re cutting back drastically until he is old enough to remember trips. We’ll take more local trips as well to save money.

Saving is not a option for the most of us, that live in Portugal…

the income immediately takes three hair cuts, one for charity, another for retirement planning and one for a real estate investment fund. the remainder builds over time considering we spend less than we bring in. that said, earning and using money to live the kind of life we want is what i am all about. as long as the necessary buckets are being filled, i don’t think twice before spending the rest

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