Money, Money, Money: When to Spend It, Save It, Invest It

Ever dream about winning the lottery?

While I know what I’d love to do with it… at the same time, I can’t help but wonder: Does having that much money really change anything? So many lottery winners find themselves in serious financial trouble or even end up going bankrupt. All that money can be both a blessing and a curse.

Psychologists call it hedonic adaptation. When they compared the happiness levels of lottery winners to severe accident victims who lost a limb, they found that while initially the lottery winners were happier than the survivors, after a year passed, happiness levels for both groups returned to the same as they were pre-incident. Those who were generally happy all the time were still happy, even while adapting to life without full mobility. Those who were generally dissatisfied were still dissatisfied, even with millions in their pocket.

Each of us has a happiness set point. So while we might learn to stretch and grow our happiness, winning the lottery or even achieving financial peace won’t bring us there. We have to learn to land on our feet no matter where we are.

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That said, money is often the source of many worries. It’s easy to say, “Don’t stress out about finances,” but when we don’t have enough to pay our bills or care for our kids, money becomes a devastating concern. For most of us, our money worries fall somewhere in the middle. We’d like to know when to save, when it’s okay to treat ourselves, and when we should use our money for a greater end goal.

So whether you received a holiday bonus, an unexpected tax credit, (or if you won the jackpot!), here’s what our team discovered about when to spend, when to save and when to invest!

When To Spend Your Money

· Is it a need?

Before spending, the first question is, “Is this an item I really need?” Now, not to say every dime we spend must fulfill a dire need. We may purchase items because they fulfill the need to beautify our home or add professional attire to our wardrobe. Not all needs are urgent OR created equal.

Many of us are struggling to make ends meet, a situation which often comes from buying too much “stuff.” We purchase items we don’t need and barely want because we get a temporary lift from the purchase. We buy on impulse. If we’re cutting back on our purchases and working to save money, then need vs. want is the first question we should ask ourselves.

·Can I afford it?

This may seem obvious, but many of us end up taking on debt because we purchase items we really can’t afford. We may convince ourselves buying a fancier car or going on vacation is a need, but when we step back we know these items really fall into the want category.

If we want to get out of debt and get a handle on our financial situation, then we must absolutely refuse to buy items we can’t afford. The only exception is a medical or home emergency where there’s no choice but to spend beyond your means. Other than these rare circumstances, refuse to swipe a credit card as a solution.

·Can I substitute or improvise?

Many times, we’re able to get by with a temporary fix or a simpler solution. If the air conditioner goes out, perhaps purchasing or borrowing a small window unit will temporarily tide you over until the repair can be afforded. If the lawnmower breaks, check Craigslist or a neighborhood exchange.

This is especially useful for items like kids’ clothing, sports equipment, furniture and other items where gently used will fit the bill. A friend of mine landscaped their entire yard with free stone they found on Craigslist. While she and her husband couldn’t choose the color and exact style of the stone, when they put it in place it looked beautiful and professional. Aside from their own sweat-equity, they didn’t pay a penny. Always check around before making a major purchase.

·If I say no, will I regret it in the long term?

If you’re about to spend, ask yourself, “If I skip this purchase, will I regret it a year from now? What about five years from now?” This question almost instantly eliminates the unnecessary items from the shopping cart. Most trivial purchases—clothing, gourmet coffee drinks, a candle or a magazine—we could skip and feel zero regret in a matter of days (sometimes minutes).

On the other hand, sometimes we’re faced with a once-in-a-lifetime opportunity, like a performance only playing in town for three nights or a weekend trip with friends. When these opportunities arise, we may later regret skipping it. So, when it comes to family vacations or activities with loved ones, find ways to enjoy them without overspending, but don’t skip out entirely. There are many ways, like packing food, driving or sharing accommodations, to help us enjoy life to the fullest with no regrets!

·Am I debt-free and do I have an emergency fund?

When it comes to spending money, one of the biggest litmus tests is whether we’re debt-free with an emergency fund saved up. If you’re emergency fund is $1000-2000 and you’re actively working to save up enough for your long-term goals (such as tucking away six months’ salary and saving for retirement), then treating yourself now and again is fine!

When we spend ourselves into greater debt or a precarious financial situation, it’s stressful. It leaves us unsettled and constantly worried about money. If you find financial footing to get on track, then it’s perfectly okay (and even encouraged) to learn to enjoy money again. It doesn’t mean repeat the same patterns as before, but it does mean softening your grip on the purse-strings and enjoying yourself.

When to Save Your Money

· Am I protected from emergencies and is my debt paid off?

The most important time to save is if your family is unprotected for emergencies. This means building up an emergency fund of $1000-$2000 dollars. This amount is generally enough to cover any sudden expense, such as a medical bill, a trip to the auto mechanic or a vet visit. While this isn’t an amount to fully protect you in the long-term, an emergency fund should cushion any financial blow in the present.

When preparing for longer-term savings, tuck away 4-6 months’ salary. Consider what would happen if you or your spouse lost a job, faced a sudden illness, an accident or other dire situation. Of course, it’s best to pay off debt before tackling this bigger savings goal, but once your debt is crushed, consider saving enough to protect your family from whatever life throws your way.

· Can I afford to wait?

When deciding whether to spend, save or invest, ask if you can afford to wait. Rather than spending on a wanted item right now, if we wait a few months we can often save enough for a wiser purchase.

For example, buying the cheapest car on Craigslist, might solve an issue today, but carpooling or riding a bike to work for a few months could allow you to save for a car in better condition. In the long term, this means fewer repairs and other costs from driving a clunker. Of course, not all purchases can wait, but allowing a few months to save will result in a wiser investment later.

· Will I make the purchase in the next five years?

If you’re planning on a major purchase in the next five years—a down payment on a home, a new car, sending your kids off to college—then investing your money long-term isn’t the best plan. Many investments build interest over time (hopefully) but in the short-term, early withdrawal may result in a major loss.

For purchases in the next five years, it’s wiser to save money where it’s more accessible. There are still solutions (such as CDs) which yield a higher return than a regular savings account, so discuss options with a banker or financial advisor. If saving for a purchase, keep money in a savings vehicle that will pay off and won’t penalize an early withdrawal.

· Is this a small, unexpected gift?

Did you receive a small, unexpected monetary gift? If a few hundred or even a few thousand dollars has suddenly fallen in your lap, use it to fortify savings! It’s tempting to view “free money” as an opportunity to go out and blow it on a bunch of “fun,” but using it for savings is a better choice in the long term.

Once you’ve built up savings, you’ll gain more flexibility to spend on the purchases you want. You’ll feel at peace and you’ll experience less stress about your financial situation. Feeling at ease with your finances and breaking out of a financial slump is well worth skipping the temporary thrill from spending money on Amazon or at a favorite store.

· Do I have a specific goal in mind?

If you’ve set a specific goal, then savings is the way to go. Are you hoping for a great vacation? Do you want to purchase your dream home? Are you building up an emergency fund or 4-6 months’ salary in your savings account? These are all great goals!

Goals should be measurable and attainable. If you’ve already achieved several financial goals, putting money in savings automatically is a good habit of course, but it’s not always a great long-term investment strategy. If you don’t have a specific short-term savings goal in mind and if you’ve tucked away enough to cover your needs, then it’s time to start investing money so it will work for you!

When to Invest Your Money

· Am I preparing for retirement?

The first topic that comes to mind when we think of investing is retirement. It’s a common long-term goal many of us share. We envision the day when we’ll spend more time with our spouse, enjoying travel, relaxing together and simply living the good (retired) life.

Yet, many haven’t even started to save for retirement. By the time we reach our thirties, retirement is a consideration that should be on our radar. If you’re carrying debt, tackle your payments first, of course, but if your employer offers a 401(k) or pension match, then it’s a good idea to contribute the minimum to take advantage. Retirement will arrive sooner than most of us realize!

· Is this an unexpected windfall?

If you receive an inheritance, sell stocks or strike gold in your backyard, it’s tempting to spend to your heart’s content. You may want to use the money to pay off debt or you may feel tempted to buy a new car, house or another big-ticket item.

Here’s the deal, most of us only receive a windfall, such as an inheritance once in our lifetime. Whether it’s a few thousand dollars, or tens of thousands, investing your money is a better long-term strategy. If you spend the money on a big one-time purchase, it’s gone. That’s it. If you invest it, you can use the money to provide for yourself well into the future. This is the reason, so many lottery winners don’t experience long-term financial success.

· Is my family covered for catastrophic emergencies?

Is your family covered for the worst of the worst? When we faced Hurricane Charley a few years back, it destroyed so much of our home and so many of our possessions. If your family faced an illness or a disaster, are you prepared?

The best way to prepare for big emergencies is to get life, disability and catastrophic insurance coverage and of course, to tuck away 4-6 months’ salary to get you through. Life insurance is used as an investment vehicle (if you purchase a Whole Life policy) but there are other investment options that may yield a higher return (such as an IRA). Discuss your options with your financial advisor.

· Am I okay if the money is tied up for over five years?

With many investments, your money is untouchable for at LEAST five years, possibly longer. Certain investment products don’t allow you to withdraw money until a specific age. Understand if you choose to withdraw before an investment term is up, you may face fees and penalties which could greatly reduce earnings and negate any benefits.

Investment is a long-term financial strategy, not a temporary or “get rich quick” solution. Most investments such as mutual funds and stocks require years to build up interest and earn a return. Unless you plan to become a full-time day-trader, it’s very hard to trade and move money constantly. Instead, invest in a wise, diverse, lower-risk product recommended by a trusted advisor.

· Will investing yield a better return?

If you’re on the fence about when and how to invest, look at the possible return. A regular savings account receives between .06% and 1% interest in most cases. That kind of return isn’t going to yield any sort of long-term benefit. Stocks and 401(k)s return from 4% up to even 10%. Real estate is also an investment option that yields over 10% (depending on the market and many other factors).

Point being, investing your money is almost always a better strategy to get a higher return in the long term. However, you’ll want to invest with a professional and financial advisor you trust. Assess your situation with your advisor to decide what will work best for you personally. If you’re hoping to retire in 10 years, your investments will look much different than someone who’s planning retirement 30-35 years down the road.

What we do with our money—spend, save or invest—is a personal decision producing very different results. The most important step is to decide wisely and carefully. While money can’t buy happiness, saving and investing your money will result in peace of mind and fewer worries. Wise investments are a far better long-term strategy than lottery tickets (unless you win the jackpot)!