Live a Little, Save a Little: The Case for Doing Both on Purpose

How much should you save and invest for the future, and how much should you be spending on experiences now? This is one of the most universal conundrums people face as young adults.

The stakes are high: spend too much, and you may wake up one day, panicked because you are years behind in your retirement needs. Invest too much, and you may look back, regretting the fact that you did not get the most out of your youth.

The pendulum of opportunity cost swings both ways. The value of investing early is immense, but there are undoubtedly experiences in your 20s that are not easy or practical to have later in life.

A good way to minimize future regret is to avoid drifting to either of the extremes. The concept of utility can help you figure out where your line is.

Understanding utility: the economics concept that reframes how you spend

There is a principle in economics that can be a powerful guide for this conversation: diminishing marginal utility. This might sound technical and academic, but it is actually very simple to understand, and it’s genuinely useful when making decisions.

Think of utility as a way to assign a number to how much value or benefit something gives you. Diminishing marginal utility simply means that the more of something you have or consume, the less valuable additional units become.

Let's say you're extremely hungry, and you order a large pizza. The first slice you eat, you're likely to assign a lot of utility to it, perhaps a 9/10. The second slice? Maybe 8/10. As you eat though, the value in consuming more goes down, and can even become negative, if eating another slice will make you sick.

This same principle can be used to inform this conversation. Most people will agree that there is a lot of utility in having a good financial foundation, but perhaps not as much in endlessly stashing money away with no aim except growing the number.

On the other hand, there is also a lot of utility in allowing yourself meaningful experiences and purchases at different stages of life, as long as it's not to the point where you are trying to escape or ignore your future, and the realities that come with it.

How to structure a high-utility vision without sacrificing your present or your future

Let's start with the financial foundation. Here are a few guardrails that, regardless of where you land in this discussion, are all critical for both your present and future:

1. Not accumulating or ignoring high-interest debt. This is one of the biggest financial traps people fall into. Credit cards, for example, typically carry interest rates over 20%. This is a massive fee to pay for purchasing things you don't have money for, and creates a massive hill for people to climb. Avoiding this situation altogether can save you years, even decades, of financial headache.

2. Having a base emergency fund. A general guideline is to have 3-6 months of living expenses saved. This powerful buffer is what stands between having to use that same high-interest debt, and also from simply being broke!

3. Having a plan for your future. I am not suggesting that someone in their early 20s should have their life figured out. However, having a vision for how you're going to start to build some wealth is worth taking seriously.

To expand on point 3, one of the first retirement milestones most financial experts recommend is having 1 year of salary invested in retirement accounts by the time you turn 30. Setting up an employer-sponsored 401(k), or having a concrete timeline for doing so, will often take care of item number 3 if funded and invested properly. (It’s important to note that it is totally okay if you haven’t reached the recommended 1-year-of-salary-invested benchmark yet! Everybody has a unique financial journey. Having a strategy to reach your financial goals is far more important for your success than hitting very specific targets.)

If you have these things in place, I believe there is a lot of room for individual preference. Do you really value traveling in your 20s before you have a rigid career and kids? Do you want to dedicate a year or two to charitable work, religious missions, or other unpaid endeavors that would enrich your life? Do it! With a solid financial base in place, you can afford to spend time and money doing things you assign a lot of utility to.

On the other hand, maybe you're someone who really prioritizes the time value of money, and you want to save and invest as much money as you can when you're young, so that it has many decades to grow. You don't care as much about traveling or other novel experiences as a young adult; you just want financial growth and security.

If you fall into the time value of money camp, your mindset is completely valid. I would just encourage you to deeply consider one thing: What is the vision for what to do with all of this extra financial growth? Where is the off-ramp where you take your foot off the gas pedal, and start enjoying the fruits of your labor and financial discipline?

There are many good answers to this question. Perhaps the answer is, "I want to be able to spend lavishly on my spouse and kids," or "I want to be work optional starting at age 45 and spend lots of time doing things I enjoy," or "I want to achieve a level of wealth that not only secures my future, but allows me to give charitably and have a positive influence on the world."

As long as you have an answer to this question that you are satisfied with, and you run some numbers to support your plan, you’re handling your money with real intention.

Grounding your saving and spending balance in real numbers

My colleague, Gilles Hudelot, wrote a solid piece outlining the 50/30/20 budgeting framework. This is an excellent way to balance all of the concepts explored here.

Keeping fixed costs around 50-60% is the most important variable to start with, because fixed costs are the hardest to change. If they are too high, there isn't enough money left over for discretionary spending, and for your future.

One way to stay mindful of fixed costs is to be wary of lifestyle inflation, which is increasing your lifestyle as your income grows. If you are following the 50/30/20 strategy, a $1000 increase in monthly income does not mean you can add $1000 a month to your fixed costs by getting a nicer apartment, more expensive car payment, and so on. This is one of the most common ways people wake up one day and their fixed costs are at 80%. Instead, if you use this framework, all parts of your budget (needs, wants, and savings/investments) should get a piece of the pie to stay in harmony.

A Fruition Mentor can help you take a closer look at all of your key financial numbers, and begin building a rock-solid financial plan that keeps you investing in your future, while still remembering to mindfully spend on things you care about in the present moment. Book your session today; we’re here for you!