How to balance money: Saving, managing debt, investing and having fun

It's a common question: How do I prioritize financial goals and mix in some fun? Walk through some steps you can take to help you strike the right balance.

Tags: Budgeting, Debt, Goals, Investing, Lifestyle, Planning, Savings
Published: September 19, 2018

Americans talk a lot about balance. And it’s no wonder: Scientists report the average adult makes 35,000 decisions each day.1 A fair amount of those concern money: Should you buy coffee or make it? Is it worth it to drive a few extra blocks to the gas station that’s 25 cents cheaper per gallon?

Knowing your priorities can help make those decisions easier. If you know you have a big meeting, treating yourself to coffee might give you a psychological boost that’s worth an extra few dollars. If you’re saving for a house, taking a detour for cheaper gas might make sense.

Big decisions often work the same way. Whether to focus on saving, investing, paying down debt or enjoying the moment is a question we ask when we gain financial independence. But it’s perhaps more important than ever when you’re settled into your career and planning ahead for some of life’s biggest costs: kids, education, a house, and eventually retirement.

The following considerations can help you figure out your priorities. Once you’ve established your list, the big financial decisions in your life can start to feel more manageable.

 

Define your goals

You know you need to save, plan for retirement and keep your debt in check. But what does that really mean to you? It can be helpful to put the numbers on the back burner and think in terms of what you want your money to do for you, instead.

Do you:

  • want to buy property?
  • have or want kids? If so, do you have a plan for their education?
  • want to be free of lingering debt?
  • value regular travel, enjoy live music, or like trying new restaurants?

You might be planning for more than one of these things, or have completely different things in mind. “What matters most is prioritizing your goals, in writing, so that you can weigh them and make a plan to work toward them,” says Tom Rushin, vice president, division consulting manager at U.S. Bancorp Investments.

 

The debt dilemma

Debt is often thought of as universally bad. It costs interest and can hurt your net worth. But not all debt is created equal. “Using debt to help manage your finances can be a useful tool,” says Craig Bartlett, vice president, division consulting manager at U.S. Bancorp Investments.

Most people can categorize their debt into productive and nonproductive. For instance, you might consider your mortgage productive debt: It can help you build equity (and your net worth) and may help you qualify for a tax break. Student loans can also be thought of as productive debt — they may have been necessary to help you get an education that led to you earning your current income.

On the other hand, credit card debt, especially if it was accrued spending on things that don’t contribute to your net worth or financial future, is often considered nonproductive. “If it’s not contributing to your future, get rid of your debt as soon as possible,” Bartlett says.

Even productive debt can be unproductive when it carries high interest rates. “High interest rate” can be a relative consideration, so it’s generally a good idea to consider whether the interest you’re paying on debt is higher than the return you might receive if you invested the same money.

 

Are you ready for an emergency?

Even the best-laid financial plans can be derailed by an emergency. So, having a plan in place can be critical to achieving your goals, whatever they are.

Rushin and Bartlett recommend having enough cash to pay for three to six months of day-to-day expenses in case the emergency affects your ability to earn income. Next, start to think about where you’re keeping it. Consider products that might earn you a higher interest rate than a standard savings account, such as a money market savings account. You might also consider liquid investments, such as T-bills.

If you have an emergency that requires a smaller amount of savings, you may want to think about using a home equity line of credit to pay for it. “You wouldn’t want to sell assets to cover an unexpected expense, so maybe taking on some low-interest personal debt would be better,” says Rushin.

Your emergency plan may vary based on your financial situation and the goals you prioritized previously.


Saving and investing

How much money you set aside, and whether you choose to save it or invest it, will also reflect your goals and timeline.

Consider investing for your longer-term goals that will allow you to benefit from time. Let’s say you want to prioritize saving for your child’s education. You may want to consider a 529 plan − it acts similarly to a retirement investment account in that your contributions potentially grow tax-deferred and, as long as they are used for qualified educational expenses, will come out tax-free as well. While investing carries risk and returns aren’t guaranteed, if your child is still young, the longer time frame might make the potential return of a 529 plan worth the added risk.

If you’re thinking about your retirement plan, you may want to consider investing your money in an account with tax benefits. But the same principles apply. If you’re looking to retire in 40 years, the amount you set aside and how much risk you take on in your portfolio are likely to be very different than someone focused on retiring in just 20 years.

When deciding how to invest for your goals, be sure to carefully assess your risk tolerance. According to Bartlett, one of the most common mistakes people make is being too conservative with their investments. Talking to a trusted financial professional can help you assess the risk of different assets and which might work for you and your goals. 

Consider saving for shorter term goals. For instance, if you’d like to buy a house in two years, investing makes less sense. Instead, you’re much more likely to cut back on how much you’re spending on non-essentials, and put your savings in an easily-accessible savings account. You might also check your credit and start thinking about some of the other costs associated with home buying besides just a down payment.

 

Don’t forget the fun

For most people fun is more of a day-to-day priority than a goal, but it’s still incredibly important to your quality of life — and your budget.

While you may have heard that the best things in life are free, it’s still a good idea to plan for them. “It’s dangerous to just spend money on those types of goals without carefully considering the financial impact,” says Rushin.

It can be helpful to think of fun in non-financial terms. For instance, if you value the family time you get on an annual vacation, the destination may matter less than making sure you get a break each year to spend time together. Once you’ve identified that core criteria, budgeting for fun can be easier.  Some years, you might be able to vacation in Europe, other years you might go camping.

“Working with a financial professional can help. They can look at your wish objectively and say, ‘You have X amount of dollars you can spend on this,’” says Rushin. Incorporating enjoyable activities into your financial plan year-round, whether it’s a semi-annual vacation or weekly date nights, can help you make sure having fun doesn’t derail your fundamentals.

 

Stay disciplined

There are a number of theories for the best way to prioritize saving, investing, managing debt and enjoying life.

  • If you’re weighed down by unproductive debt, focus on paying it off while putting less into the other categories.
  • If you have debt but it’s manageable, consider building up your emergency fund and establishing regular investment contributions.
  • If your mortgage payments are manageable, you might consider saving toward a kitchen remodel.

How you balance these things generally depends on your life stage and personal goals. These decisions are never cut and dry and what’s right for you might not be right for another person, even if you have similar financial situations. Just like knowing you have a big meeting might trigger a decision to buy a latté rather than making your coffee at home, knowing where you want to be five years from now can make your big picture financial balancing act much easier.

 

Learn how Wealth Management from U.S. Bank and U.S. Bancorp Investments can help with your planning needs.

 

135,000 Decisions: The Great Choices of Strategic Leaders.” Leading Edge Journal.