In All Things, Moderation

July 26, 2013

To borrow a line from Dickens: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” The title of A Tale Of Two Cities really hit me as I read this article about a couple who paid off their mortgage in less than 5 years.  They made a lot of changes/sacrifices in their financial life in order to pay off their mortgage and be totally debt free in a short period of time. They are being very frugal, looking for ways to trim their cost of living and putting off instant gratification and some “fun” right now in favor of getting totally out of debt and putting into place a lifestyle that would require only minimal incomes to sustain.  This is a family that is taking financial independence and financial security VERY seriously. 

I read this article about 15 minutes after the other side of the “tale of 2 families” couple left my office. The other couple has made absolutely no sacrifices at all. They earn a quarter of a million dollars per year and have managed to accumulate about $75,000 in credit card debt and 401(k) loans over the last few years.

This is a family that feels like one day they’ll take their financial security seriously, but until then, they want to have as much fun as possible regardless of the cost. Their philosophy is that they make plenty of money and when they get serious about reducing their spending and paying off their debt, they’ll be able to do it quickly. To some degree, I agree with them.

But…as we’ve all learned over the last few years, jobs often don’t last forever.  They are at an age, career stage and income level where I’ve seen far too many people get caught up in layoffs and job eliminations.  If that were to happen to either one of them, they would be in a whole lot of trouble financially. They could go from significant incomes to bankruptcy in the blink of an eye. By not tackling their financial issues now, they are putting their future at risk.

The part that I find fascinating is that they know this.  And they seem to enjoy the level of risk that they’re taking on.  Human behavior, especially when money is involved, is so incredibly interesting.

Within the span of minutes, I met with a couple living on one end of the spectrum of financial behaviors then fired up my laptop and read a story about a couple living at the polar opposite end of the spectrum. I worry about both couples a bit, probably the free spenders more though. They are inviting trouble into their financial lives and that is troubling to a financial planner who has seen too many people try to patch together their financial life after a corporate downsizing or start saving substantially for retirement when it’s too late to build the asset base needed to live anywhere near the kind of lifestyle to which they’ve grown accustomed.

The frugal couple concerns me only to the extent that I hope they don’t end up looking back at this phase of life with regrets about what they might have been able to do.  Life is meant to be lived, and there are things to experience.  Are they narrowing their focus so much that they aren’t going to enjoy their lives?  If one of the spouses were to die, would the other live a life of regret because they didn’t get to do X, whatever X is?

What can we learn from these couples?  Living on the extreme end of the budget spectrum can be unsustainable over the long term.  If you put the clamps on your budget and focus completely on frugality, you may miss some of life’s experiences that can only happen by getting out of the house and spending a few dollars.  If you have no limits on your budget and spend as if there’s no tomorrow, what do you do when that tomorrow comes and it’s filled with some bad news?

When dealing with your personal budget, try to maintain some level of balance between living for today and preparing for the future.  A financial life out of balance can come apart with either frustration and regret or sheer collapse from the weight of ongoing funding requirements. How do you find that balance?  Take a look at your budget (two great tools are this Expense Tracker as well as mint.com) to ensure that you aren’t spending more than you’re making and that you have some room for savings.  Use this calculator to see how much of your current income you’re on track to replace in retirement and if it will be 250%, you might want to consider retiring earlier, spending a bit more money today on life’s experiences, or relaxing some of your budgetary restrictions so that financial stress is no longer a part of your life.  As a wise man once said (OK, maybe more than once), “In all things, moderation.”