Our lifestyle was already pretty comfortable and we were saving. I am struggling with how much of this extra cash we should feel good spending on unnecessary-but-joyful splurges such as fancy dinners, cleaning services etc vs how much of this windfall I should just be saving.
I grew up lower middle class and do not have a great financial background.
Here's what I learned to do, that worked for me:
- Make a cool spreadsheet for yourself and run little experiments to see what works. Never trust a single, fixed number for savings, spending, anything. Life and emotions are way more nuanced than that, and part of you (especially the I'm My Own Person Now part) will practically yearn to disobey those unreasonably-fixed orders.
- The spreadsheet should include projections, so you can adjust some numbers and see the results as they would turn out in a year or so.
- When you notice lifestyle-overage issues, or shortfalls, accept it, make adjustments to the spreadsheet logic that may help, and don't scold yourself too much.
- Splurge, always splurge to some degree. Splurge early and often.
- When your splurging is over and you're going "why did I do that, man what a stupid day/week/month" that's the perfect time to head to the spreadsheet and set some very simple guardrails that may be helpful next time.
- Some guardrails that can help a lot are things like automatic reinvestments and automatic withdrawals to places like brokerages.
Just some ideas from my own experience, in case they help. Good luck...and congrats!
I find it incredibly helpful for making sure I’m spending money the way I intend to. It’s very easy to otherwise forget how much is going where.
Edit: the above didn’t really answer your specific question about “how much” to allocate to saving vs spending. Kind of a tough thing to put a number on but save more than spend
Not even bonds/CDs - just a high yield account. It is instantly accessible when I need it.
If and when the market ever drops 30+% and a recession starts to loom (seems pretty close to what's going on now) - I never have to worry will I be okay, what if I lose my job, what if I get hit with some massive unexpected expense.
I have money in the bank to get me through it all. I won't be forced to sell any equity at a time when its worth a lot less, I won't have to change my lifestyle one iota.
That security is worth the potential loss of future gains. I already have a lot in the market anyway and I keep adding more.
I'm also single with no kids so 1+ year in cash looks very different for me vs someone married with kids and all the associated costs. Even so, it's an approach I find very comforting and I hope to maintain when I'm further along.
Also medical bills tend to be twice as expensive as what you'd think they are, so a single medical incident can wipe out a solid chunk of that 6mo net.
If you start spending, you'll keep spending. Once you taste the fancy butter and breakfast on organic non-bleached sourdough, going back to margarine on toast makes you unhappy.
Money, like food, is dangerous. If you're comfortable, more of it just makes you 'fat'. It's harder to dial back to being acsetic later.
However, going through the journey of opulence is something people should try. Buy the expensive chocolates, eat the steaks with gold leaf, sleep at top hotels for absolutely no reason, buy flights to visit the crowded wonders of the world. Just manage expectations that this indulgence is not the peak of your life, but rather a low point.
Once you get that out of the way, use the money to fund activities that will add to your well being. Careful with adding stuff to your life. Ultimately you will need to take care of it. Many people become slaves to it and the more you have the more you will have to take care of.
If you have money left after paying off debt, pick a % of the temporary windfall that you are comfortable spending and spend it (doesn't matter what categories you want to spend them as long as they are meaningful to you).
Take the remaining and save it. Since you say you are already saving, just add this on to those same saving instruments.
You can apply this principle to any incremental dollar received over your average base income eg: annual raises, bonuses, cash gifts, winnings, inheritance etc.,
Your saving (or investment) pattern i.e., which savings/investment instruments you choose depends on your risk profile.
You'll almost always be better off putting your extra cash into index funds instead of overpaying a mortgage.
Index funds historically return ~7% long-term, while your mortgage will likely be 3-5%. By overpaying a mortgage, you're missing out on an extra 2-4%: it's better to pay ~4% in order to get a gain of ~7% elsewhere.
Not to mention that every cent you put in to your mortgage is now locked in to your home equity, meaning it's difficult to access that money if you need it. You can sell your stock holdings and have the cash in a matter of days. Accessing the money you put in to mortgage repayment probably means taking out a HELOC or similar, which takes time and requires getting approved for the loan. If you're in a particularly bad situation, this might not even be plausible. And you'll pay extra interest for the privilege of accessing your own wealth.
On top of all of that, the tax implications are bad too. Long-term capital gains rates are low. Mortgage interest you pay is deductible. You lose both those benefits by overpaying your mortgage instead of investing the cash.
Of course, in fairness, early repaying a mortgage is a guaranteed return of 4%, while investing in the markets carries risk. However, in OP's situation—where they likely won't need any of this extra cash on short notice—you can ride out down markets and sell once they've recovered.
Also, people often say that you shouldn't invest money that you don't need in less than five years. The present time is a good example of that. So, treating securities investments as liquid in periods smaller than that is dangerous.
Assessing potential risk is just as important as assessing gains.
1. Don't make any sudden changes! Think for a least a month before making any big purchase, sometimes it still is desirable after waiting, sometimes it is not! You got this far without it so far, so another month isn't a big deal.
2. Use a tool like projectionlab.com or a spreadsheet to calculate how much you want to be saving for retirement. If you're maxing out tax-advantaged accounts that is pretty good already, but it is good to have a target for how much to save each year on top of that.
3. Try to keep your "burn rate" low. I think it is better to try and keep your long term recurring costs based off of your old salary as long as possible. Pay cash for any fun things, so if you lost your job tomorrow you don't have big obligations like a huge mortgage or lease payments.
The term I heard is HENRY - High Earner, Not Rich Yet! A lot of people spend it as soon as they make it and never accumulate wealth.
Good dinners are more affordable than fancy ones (even if you eat out for both, you get more for your money at an "average" restaurant than a top class one that exists only to show other people how much money one has).
I'd mainly focus on the things that take up at minimum 1/5th of your lives: Bed quality is nice to improve, keyboard/mouse/screen/computer, shoes, etc.
whatever amount spent, just make sure your savings are always increasing, the faster the better, but don't feel the need to over-do it.
but past that, invest a portion of your savings, since banks rarely meet inflation rates.
Index funds, housing, crypto if you feel daring, etc, don't invest too much (especially if monkeypox becomes a full-blown thing), but also don't invest too little, (or you are basically losing money over time)
and then through that, your retirement will arrive earlier
Maybe enjoy some extra travel but otherwise I try to be pretty anti-consumption soas not to get swept up in the hedonistic treadmill involved with keeping up with the Joneses.
I’m not in the extreme thrift camp but we have no debt aside from mortgage and aren’t into conspicuous consumption. Our van is an 03.
