When our parents reminded us that we cannot have our cake and eat it too, it taught us all we need to know about the saving versus spending choice.
Since debt and money problems are such a big source of stress for so many people, logic tells us that we would be happier with a bit more balance – less debt, lower spending and more in the bank. The problem is, when it comes to the spending part, or the eating of the cake, many of us are naturals. The reward of having our cake is what sometimes gets lost amidst the noise of the products advertised to us on TV and the web, and the temptation to have what we think will make us happier.
If you try to make your own cake, you also know that there are instructions on the box, which generally keeps you from making an early withdrawal (baking term) of your cake from the oven after only 5 minutes when it was supposed to stay in for 30.
If only money came with similar instructions, there may be fewer instances of costly mistakes – like making an early withdrawal (financial term) of your retirement funds after 5 years when they were intended to be left to grow for another 30 years. But there is no box of instructions around your retirement plan that says “Warning – use of these funds for short term cash needs can result in penalty, additional income taxes, and can be a giant step backwards in your ability to retire when you want to”.
Too many employees are simply unaware of the consequences of tapping into tomorrow’s money for today’s spending. According to research by Hewitt Associates, 45% of employees cash out their 401(K) plans when they leave a job.
What if everyone were educated on the proper care and feeding of their retirement nest egg? And while we’re at it, how about some guidance on building a budget and managing our debts so we can feel in control of our financial lives?
The box of cake mix also comes with a picture of what the delicious cake will look like when it’s done. It’s a good idea to have a reminder of why you are putting in the time, effort and resources, and what you want your financial life to look like.
You are in charge of creating that initial picture of what life will look like when you are debt free, when you have the security of emergency savings and when you are on a course of smart investing so that you can reach your goals. By holding on to this picture you will be more likely to avoid spending on things that seem appealing today, but in the long run would not be worth the tradeoff of your financial independence.
We have five options with each dollar in our wallet. We can save it, invest it, use it to pay debt (or taxes), spend it, or give it as a donation or gift. If the spending choice always seems to be the most satisfying, then a little more balance may be in order. As soon as we can identify the smart choices with our money as the obvious ones, it will feel perfectly natural to live within our means, invest for the future and avoid spending money on things we don’t really need. That kind of balance will truly provide the recipe for success.
