Sometimes when we need more money for a specific goal in the future such as retirement, college, a down payment on a home or an emergency fund we may feel that before these things can happen we need to make more money. We may feel that once our incomes are up to a certain level that we’ll be able to afford to save for those goals.
It may not be necessary to earn more in order to achieve the above goals. For many folks the solution is simply to prioritize between wants and needs. In other words, learning to distinguish between the wants and the needs in your life and then reallocating your money to fund retirement or college goals without having to ask for a raise or get a second job.
The following exercise is one I enjoy doing with my students. Recently I had the opportunity to demonstrate the power of this exercise and it inevitably comes up whenever I have a student say they “can’t afford” to save for retirement while in college. Grabbing a marker, I start asking them to tell me things they have that are wants and I start writing those wants on the board. Here are some examples from students with monthly averages agreed on by the class:
- Dining out/fast food – $100/month
- Car Payment – $250/month
- Cable TV – $120/month
- Smartphone $80/month
These are just a few of the things they mentioned. Other items included excess clothes and shoes, getting hair and nails done, and playing the lottery.
There were times I had to “encourage” students to really think about what were wants versus needs. Generally, a big point of contention is smartphones. Many students (and readers) will rationalize that they need them, but in reality admit they aren’t a need. And that’s the point to this exercise – rationalizing. We’re very good at rationalizing what we want; but is it really a need?
Initially, my students will rationalize why they need the things they want and as older adults we argue why we couldn’t live without certain things. This is where the fun begins. Taking the figures above and adding them together we get a sum of $550 per month. That’s about $92 above the maximum monthly contribution to an IRA which is $458.33 for folks under age 50. So that’s maxing out an IRA and still having $92 left over to invest.
Grabbing my trusty financial calculator and using the students’ timeline for retirement we agreed on 40 years until they would retire and came up with a reasonable rate of return in the market of 7% over 40 years. The amount blew them away: $1,443,647 – all without having to make more money (this was money they were already spending) and all before graduating college.
For all of us, it boils down to priorities. Once we make our future financial needs a priority we can change our perception of what we really need versus what we want and reallocate our money accordingly. Of course, if we make more money we’ll have established good money habits to allocate that extra money for our needs, and it becomes less tempting to spend it elsewhere.