Do you compartmentalize your money? Studies suggest you do. Most people have some money that they use for necessities, some money that they use for luxuries, and some money that they are saving for the future. Many people have these different categories without even realizing it. For instance, if you’ve ever said, “I need to eat, so I’m going to buy groceries even though I don’t have much money right now,” or “I can’t spend that money, that’s for my retirement,” then you think like this. The trouble we have is keeping these compartments in proper proportion.
I’ve seen people who save like madmen for retirement, but live like paupers now. I also know people who spend too much on luxuries now without any thought of the future. Where is the line between necessities, luxuries, and the future? Try this little thought experiment. If you lost your job tomorrow, what could you cut out to survive until you found a new job? Can you cut out groceries? Of course not, but you could probably cut out potato chips. Is a glass of wine with dinner a necessity? For some people it is, but think very hard before coming to a definite decision.
What about retirement? When faced with a cash crunch, is it still necessary to save for the future? Depending on the severity of your fiscal emergency, it may be necessary to suspend saving for a while, but don’t automatically jump to that conclusion. Could you divert some spending from the luxury category to the retirement category? Maybe instead of deciding the potato chips are a necessity, you could decide to save that money. I won’t bore you with a compounding lesson; suffice it to say, even potato chip money, if given enough time, can grow to a substantial sum.
So try to distance yourself from the emotions of money, take an objective look at your categories, and decide how you can best deploy your resources.
This post originally appeared in the February 27, 2008, edition of the Greenhorn Valley View.