Why make a bunch of money if you cannot enjoy it? That is a question everyone asks themselves. Some people may take this idea too far and overspend, while others may go in the complete opposite direction and save every penny for later in life. The key is to find a balance that allows you to enjoy the fruits of your labor while also preserving and growing your wealth for the future.
Managing your lifestyle is all about making smart choices. Each lifestyle decision you make, from home, to car, to leisure time, has an impact on your overall financial situation. We’ll take a look at how smart strategies can enhance your lifestyle while at the same time potentially freeing up assets to invest for the long term.
In his landmark 1943 study, Maslow places lifestyle choices on an ascending scale of importance- from basic needs to peak experiences- that bring emotional satisfaction. Approaching our lifestyle choices in this way can help us separate our needs from our wants. After the basic needs of food and water comes shelter, which is our home. The type of home we choose can fulfill a higher category on the pyramid known as self-actualization. The home is not only a significant asset, it represents a significant part of our lifestyle.
If you own a home, a good mortgage choice is critical.
When you buy a home, you must consider whether to take out a 15- or 30-year mortgage at a fixed rate or variable rate. A 15-year mortgage is structured to pay off your loan quicker with less total interest, but the payments are likely to be higher. If you can afford higher payments, it may be worth considering.
If you select a fixed-rate mortgage, you’ll lock in a specific interest rate for the life of the loan. If you select a variable-rate mortgage, the interest rate may fluctuate which creates a fluctuation in your monthly payments.
Largely, your mortgage choice will depend on your individual situation. Some people want to aggressively pay down their loan, so a 15-year mortgage may make the most sense. Some people prefer to lock in on a mortgage payment, so a fixed-rate loan is the more appropriate approach. Our firm suggests you consider understanding the pros and cons of all mortgage loans as you evaluate different choices.
Where and how we live is meaningful on many different levels. Our homes are reflections of who we are, and so the decision of how much home we want—or need—may vary with each situation; it is not strictly a financial decision.
However, the financial component of home ownership should be considered thoughtfully.
For example, the cost of maintaining a large home might be put toward activities that better fit your desired lifestyle, such a travel and hobbies. Others may find that a large home still meets their needs.
Here are some guidelines for being smart about home ownership.
First, find the best mortgage structure for you. Consider your tax bracket, your income sources, and your time horizon. Structure a payment schedule that works for you.
Second, reassess your home regularly to ensure that it continues to meet your needs.
Finally, consider “right-sizing” your home if you find that the costs outweigh the satisfaction.
Luxury versus Necessity
We tend to categorize as necessities many things that our parents either never heard of or lived without.
The list of necessities vs. luxuries may be different for each person, but it is important to remember that each luxury item we buy or leisure activity we pursue has two costs: the actual costs in dollars and the opportunity cost—what the money may have earned elsewhere.
Let’s examine one item many people dream of owning: the luxury car.
Since we’re aiming high, let’s buy a Ferrari.
A new Ferrari California has 553 horsepower and has a published top speed of 196 miles per hour. It costs about $200,000. But that’s not the entire story. If we estimate taxes, insurance, and maintenance at a hypothetical 20% of the purchase price, keeping that Ferrari on the road may cost another $40,000 a year.
A new Porsche 911 Carrera S only has 400 horsepower and has a published top speed of 188 miles per hour. The Porsche costs $100,000. Using the same hypothetical 20% figure as before, the Porsche may cost $20,000 a year in taxes, insurance, and maintenance.
Say we were to invest the difference in the purchase price—$100,000—in an investment with a hypothetical 6% average annual rate of return. In addition, we invested the $20,000 in maintenance saved each year in the same account. After five years, the hypothetical account would be expected to grow to nearly $250,000.
This example shows us that even when luxury is attainable, it is still worth your time to compare the options for the best value.
Luxury items—such as the sports car of which you’ve always dreamed—may be an important part of your lifestyle. As in any other financial decision, however, that luxury sports car has an opportunity cost: what the money may have earned elsewhere.
Changes in Leisure Activities
Leisure activities can add meaning and variety to your lifestyle.
Some consumers are rethinking their leisure options, however. Instead of the luxury hotel room at a resort, many are choosing different options, such as renting a privately owned home or condo. Money that is saved by making smart leisure decisions can be used for investment.
Let’s take a look at our case-study couple, Ron and Cindy.
Cindy and Ron take a two-week vacation every year. Traditionally, they’ve stayed at expensive hotels and just figured the money spent enhanced their lifestyles.
Now Cindy and Ron have decided to rethink their leisure options—to get the same experience at a lower cost. They are replacing the $400-per-night hotel with a $200 per-night condo rented through a private owner, for a savings of $200 per night. For a two-week trip, that is a savings of $2,800 per year.
Staying in a condo also allows them to cook their own meals which can save on food expenses. By staying in a condo versus a fancy hotel, they can still have a great vacation and now have $2,800 in savings to invest or even put towards another vacation.
From home and car buying, to daily activities, effectively managing your lifestyle can lead to an increase in resources as you grow older—while still allowing you the enjoyment of some of those resources now. And you will have the satisfaction of knowing that you are a smart lifestyle manager.