The Cheshire cat in Alice in Wonderland was right about one thing: If you don’t know where you want to go, you won’t have any idea of what path you should take. When it comes to your financial and investment strategy, if you don’t know what your goals are, you won’t know how to best spend your money.
Let’s explore the actual cost of spending, the importance of building wealth, and the value of delayed gratification.
The true cost of the money that you’re spending
The number on the price tag isn’t the true cost of an item. Before you make your next purchase, figure out how purchasing that item might impact your long-term goals. If you don’t know your goals and values, you have to break it down.
Start by thinking about the areas of your life that mean the most to you, such as work or family. Maybe you want to start your own business, live downtown in a big city, or start a family. Whatever your goals are, at some point, you will need money to bring them to fruition.
Think about where your ambitions come from. What’s your driving force? Your career, traveling, real estate, or something else? All these things will require sacrifice in some areas of your budget to make them a reality.
The most important step is to understand why you want these things. Let’s say, for example, that you want an $80,000 truck. Besides the monthly payment, what is that truck really costing you? Could you drive a $30,000 truck instead to reach your other financial goals sooner? Imagine how much that $50,000 difference could impact your lifestyle!
Money doesn’t buy happiness, but if financial issues nag at you constantly from your spending habits, it can be emotionally draining. To build a strong financial future and live with an abundance mindset, you need to understand what your spending habits are costing you.
Take advantage of the experiences you can, but you have to understand what the impact could be long-term and what the true cost of that money is.
Don't give up what you want most for what you want now.
How the 50/30/20 rule comes into play
The 50/30/20 rule is a popular money management tool that can help you manage your money more effectively. It works by splitting your money into 3 categories of spending: 50% on needs, 30% on wants, and 20% on savings.
Let’s break down each category:
Needs: 50% of your money should go towards things that are necessary for survival. This includes your rent or mortgage, groceries, utilities, healthcare, and insurance. It does not include dining out, TV subscriptions, or Starbucks.
Wants: 30% of your budget can go towards non-essential items. This category is where your activities like dining out and having a Netflix subscription come into play. Anything in this category is technically optional, so it’s essential to ask yourself whether you want more money to spend or financial freedom. You may not need to give up Game of Thrones, but cutting back on dining expenses could get you closer to your long-term goals.
Savings: Saving money is critical to a balanced wealth-building strategy. It’s important to save if you need to build an emergency fund or pay off high-interest debt. When you need cash quickly, you’ll be grateful that you saved some in a safe place. But once you have that emergency money, you should consider investing—even if you just place some funds into a CD with low returns. The national average APY for savings accounts is just .1%, with banks like Chase offering a mere .01%, so your money is typically better off in lower-risk investments versus a savings account.
There needs to be balance when it comes to investing and building wealth. You shouldn’t have to live on beans and rice to achieve your financial goals (unless you really want to). It’s important to enjoy the little joys in life.
As vital as it is to follow a budget like the 50/30/20 rule, remember that priorities shift throughout our life. Goals change as we grow and mature. Don’t be afraid to adjust your budget and priorities as your goals shift.
What should you be spending your money on?
It’s not realistic or sustainable to save or invest every penny that you earn. Spending your money on things or experiences that fulfill your life is really important for your mental well-being.
Would you have more money if you lived on beans and rice and in an apartment just big enough for a bed and a kitchen? Of course you would! But would you be happy doing that? Probably not.
Saving your money is important, but spending it can be equally important. Here are 3 things you should absolutely spend your money on:
Things that improve your wellness: Investing in your physical, mental, and emotional health is vital. This could mean joining a gym, participating in therapy, finding a new living situation, or getting a massage once a month!
Long or short-term planned purchases: Building wealth is all about setting goals, so once you save for your goals go and accomplish them! If you’ve saved up for a car, and the time has come to purchase it, don’t be afraid to pull the trigger.
Things that bring you joy: You don’t have to indulge in access to build a rich life. Whether you want to get lunch with your mom, take your kids to the waterpark, or get coffee with your siblings, don’t delay gratification too much.
At the end of the day, how you spend your money completely depends on what your goals are.
The marshmallow experiment and the power of delayed gratification
The marshmallow experiment is a test that measures a child’s ability to delay gratification. It works by giving the child two options: to wait a certain amount of time and receive their favorite treat or not wait for it and receive a treat that’s not so great. The amount of time that a child waits measures their ability to delay gratification.
In the 1960s, a Stanford professor tested this theory on hundreds of children between the ages of 4 and 5. The researchers followed the children for years after the experiment and discovered that the children willing to delay gratification had higher test scores, lower levels of substance abuse, reduced risk of obesity, and better social skills.
In short, this experiment showed that the ability to delay gratification was directly related to success in life.
Instead of marshmallows, let’s put this idea into a different perspective. If you delay the gratification of buying a $100,000 car now, then you’ll be able to buy a home sooner.
Delayed gratification comes down to discipline, which is exactly what you need to successfully follow a financial and investment plan. Discipline is about understanding your goals and what it takes to get there. It may not be flashy, but it brews success.
Build wealth with Hedgehog Investments
A couple of lattes shouldn’t impact your financial well-being, but flashy purchases like cars and homes can put you in trouble. Once you realize the significance of these purchases, you’ll be on your way to a well-balanced lifestyle.
At Hedgehog, our goal is to help our clients build wealth through our alternative investment model. If you’re interested in seeing how it all works, get in touch with our team today.