Talking with my niece the other day, I encouraged her -- she’s in her early 20s -- to start a Roth IRA. It’s what I do. And typically, I do it without reservation or hesitation. I understand -- and have lived to see -- the very positive power of compounding and, frankly, the negative effects of procrastination. In my experience, starting to invest as early in life as possible is a no-brainer.
However, that particular conversation also reminded me that it’s not my way or the highway. People have to live and do things in a way that aligns with their priorities. Yes, we all make everyday trade-offs without a second thought -- you know, money spent on one thing that then can’t be used for something else, now or down the road.
However, that doesn’t mean those decisions are wrong. There isn’t a one-size-fits-all, definitive answer or approach. The conversation had me thinking about the importance of deploying money in accordance with what’s important. Not what’s important to me, your parents or your neighbors, but to you. With that type of alignment in place, would your decisions look different?
Let’s look at a few examples.
Cool Car or Nice Vacations
Here’s the basic math on how this could work. Instead of a luxury SUV with a $50,000 price tag, you could choose a no-bells-and-whistles version for $30,000. By my calculations, that chops your five-year, 6% loan payment down by $386 a month. Over the course of a year, that’s nearly $5,000 available for a family vacation or even a series of long weekends. Which sounds better to you?
Your Dream Home and Your Spending Plan
These days, home ownership is a bigger and bigger stretch for many Americans. Relatively high interest rates and steadily increasing home prices make it difficult for many even to contemplate home ownership. However, if that’s what’s important to you and your family, can you make adjustments or take actions to make it a reality? They may not be easy decisions or comfortable choices, but perhaps they are difficult moves to put you on the path to home ownership.
Eating in for In-dependence
I couldn’t leave this discussion without hitting the same point I did with my niece: the importance of starting early as you invest for the future. So what if you trimmed money spent on dining out, snacking at work or even coffee by $25 a week and invested the $100 per month you saved. With a hypothetical 7% annual return, you’d have more than $250,000 in 40 years. Visions of the freedom and flexibility that money could provide might make home cooking (or even frozen pizza) taste a lot better.
So what trade-offs are you making? Are they conscious decisions designed to improve your financial well-being or quality of life? Or are they just byproducts of life’s momentum, robbing you of the things you really value? Make thoughtful choices, have meaningful conversations and put your money where it aligns with what’s important to you.
Yes, my niece did set up that Roth IRA. However, she funded at a level that was aligned with her vision, not necessarily mine. And you know what, that’s just as it should be.
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