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If you want to use money to live a happy life, you need to answer two questions:
What do you want most in life?
How will you pay for it?
Every personal finance issue will answer one of these two questions. From there, it’s simply a matter of accounting.
Question #1: What do you want “most” in life?
This might be the most important question you’ll ever have to answer.
Nobody can answer that question for you, but I guarantee whatever the answer is, you’ll almost certainly need money to get it.
The most important part of that question is the word “most.” Humans are programmed to always want more, and every time you go on the internet, advertisers are trying to sell you on a new thing to want.
Every purchase has an opportunity cost. A dollar spent on one thing is a dollar that can’t be spent on something else.
The more you spend on things you don’t really care about, the less money you have for the things you want most of all.
What do you want more; the big house or more freedom?
Here’s an example of opportunity cost in action that hammers home why you need to know what you value most in life.
Lots of people say they want to live in a bigger house. They also might say they want the freedom to spend more time doing work they love and being with their family, even if that means taking a pay cut.
For many people, these two “wants” are in direct opposition to each other.
Buying a bigger house means you’ll be spending more money: this puts pressure on you to make more money.
Taking a pay cut in exchange for more flexibility and freedom means you’ll be making less money; this puts pressure on you to reduce your spending.
You can see how these two things are in direct opposition. Most of us can’t afford to increase our living expenses and reduce our income at the same time.
If you buy the bigger house, you probably can’t afford to take a pay cut and vice-versa.
That’s opportunity cost in action.
Don’t let other people tell you what you “should” want
Once you accept that every financial decision has an opportunity cost, you realize just how important it is to be crystal clear on what you want most in life.
The conventional wisdom in personal finance has flipped over the past decade. The consensus used to be that buying your “dream house” should be your goal. These days, a lot of personal finance writers might tell you to live in an RV to reclaim your freedom of time.
So which is the better decision?
That’s up to you!
How could any personal finance blogger know what will make you happy? Don’t let other people project their values onto your life.
If you take one thing away from this article, let it be this;
Clear some time on your schedule to sit down and spend some time mapping out your dream life.
What are the 3–5 goals that if you achieve those goals, you could look back on your life with no regrets? Once you’ve done that hard work, it’s a matter of figuring out how to finance that dream life.
Question #2: How will you pay for it?
Believe it or not, this is a relatively simple question.
It’s simple because figuring out how you’ll pay for your dream life is a math equation. You just need to fill in four variables:
The total price tag.
A realistic time frame.
How much you currently have saved towards that goal.
An assumption about the return on your savings and investments.
If you decided that one of the things you want most in life is your “dream house,” here is how you might go about building a plan to pay for it.
The total price tag to buy the house would be equal to the down payment + closing costs. Let’s say that is $40,000.
Let’s say you want to move into your dream house in three years.
We’ll also assume your are starting from scratch on your house savings.
We’ll assume a 1% rate of return because a short-term savings goal should not take on any risk.
Then, Google “free savings goal calculator” and plug in these variables. Here’s an example of a good free calculator from NerdWallet. As we see below, getting your dream house in three years would require saving $1,095 per month over the next 3 years.
These four variables are all that is needed to formulate a savings goal for anything you want in life.
Whether it’s Financial Independence, a wedding, a new car, a vacation to Australia, or sending your kid to college, you simply need to know these four variables and let a calculator or spreadsheet spit out a savings plan that will finance that goal.
Avoid the endless pursuit of “more”
One of the things I have struggled with is my tendency to constantly move the goalposts on myself. Once I achieve a goal, I don’t spend much time celebrating it before I immediately set a new, more ambitious goal.
I really hate that I do this, and I’m working on it. I would suggest you be kinder to yourself than I am.
If your goal was to buy the dream house, savor that victory.
Now, there will be times where you achieve a goal, and it didn’t really make you happy. That might be a sign that the goal wasn’t as important as you thought it was.
That is totally normal.
Figuring out what we want “most” in life is really hard. Sometimes we’ll get it wrong, and sometimes we grow into an entirely different person by the time we reach that goal.
Nothing is forever, and you can always make new goals based on the person you become in the future. As long as you continue to think about what you want most and build a realistic plan to finance it, you’ll put yourself on the track for a great life.
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This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.