Diversify Your Life: Save for Now and Save for Later
My “Diversify Your Life” topics discuss, as you can guess, diversification in your financial life, in places other than your investment portfolio.
Today, I discuss saving. While I believe retirement savings is critically important for everyone to have, I also believe that people should enjoy the lives they have now!
Let’s explore two extremes.
Extreme #1: Saving for later, but not for now.
Joe is saving for his retirement. He is single and makes $30,000 a year. He lives extremely frugally, keeping his expenses low, and manages to save $15,000 a year, even with his income. Joe wants to have millions in his retirement savings. When he does retire, he has plans to travel the world.
Joe continues to live minimally and manages to save $2 million for his retirement. He’s now 54, has $2 million, and is set to retire early. He even planned his first-ever international trip to Paris, France.
Suddenly, however, Joe is involved in a car accident and dies.
Extreme #2: Enjoying now, but not saving for later.
Amber loves to live her life! Her friends save for retirement and never have any extra money to enjoy themselves. Amber is not like that. She’s not worried about retirement. Instead, her money goes to eating out every day and shopping for purses, shoes, and jewelry. Amber makes $100,000 a year and figures she’ll work for all of her life anyways. (She really enjoys her career!)
Amber spends and spends and never saves a dime. She enjoys every day of her life. That is, until she turns 60. Her company feels that she is getting too old. Although she is still a great employee, they let her go.
They give her a year’s severance, but how is she going to enjoy her life now? She doesn’t live her life the same way, has to struggle to support herself, but somehow she manages until she dies naturally at 87.
Split the difference!
Diversifying is basically splitting the difference between multiple options. When it comes to saving, my recommendation is to save for now AND to save for later. For example, my wife and I are saving for retirement. But also, we allow ourselves a decent vacation once a year. Although we would like to travel the world one day, we have opted to travel to various parts of the US for now.
In this way, we get to enjoy ourselves now and will get to enjoy ourselves when we’re older and retired.
Recall that diversifying = reducing risk.
And that is exactly what we’re doing here. You never know what’s going to happen. Like Joe, you could die in a car accident. Or like Amber, you could live for a very long time. You don’t know when you’ll die, so if you (moderately) enjoy yourself now and save for retirement for later, then you’ll be well diversified.
