Financial Lifestyle Management
For educational and informational purposes only, This is not a recommendation to buy, sell or invest. Please consult your advisor and tax consultant.
Making intelligent and informed choices is the cornerstone of lifestyle management. From the home you live in, to the car you drive, these choices influence your financial state. Lifestyle management aims to liberate assets which allow you to invest in the long term. The goal is to make the correct decisions while balancing work, finances, and leisure to best define and meet your personal wants and needs.
To better illustrate this, we can turn to Maslow’s 1943 Hierarchy Of Needs study as a roadmap. Simply put, the hierarchy of needs is a pyramid of human prerequisites that range from rudimentary necessities to emotional fulfillment. At the top is self-fulfillment, psychological needs make up the middle of the pyramid, while basic needs form the base. Within the base of the pyramid, we see needs such as food, water, rest and shelter.
Of course, we all need food, water and rest. As for shelter, owning a home is the most distinct asset for many Americans. The type of home we choose can be a stepping stone that allows us to climb the pyramid toward emotional satisfaction.
Mortgage – The Cost of Shelter
Regardless of what stage of life you are in, it is prudent to intermittently reevaluate your home and whether it continues to meet your wants and needs. Some things to consider are:
Is it currently worth the cost of maintenance?
Does the location satisfy you?
Does the size meet you and your family’s needs?
Do you have the best possible financing option?
Of these questions, the most important thing to evaluate is your mortgage costs.
The first thing to think about when it comes to a mortgage is a 15-year vs. 30-year.
A 15-year mortgage is paid off quicker, however, monthly payments are generally higher. Additionally, less interest is paid over the lifespan of a 15-year mortgage and interest may be lower since this type of mortgage poses less risk to the lender.
With a 30-year mortgage, the foremost benefit is lower monthly payments. Lower monthly payments also give the borrower the option to buy more house than with a 15-year mortgage. This also frees up money to put toward other financial goals such as savings.
One more important thing to understand when it comes to a mortgage is the difference between a fixed- or variable-interest rate loan.
Fixed and Variable
With a fixed-rate mortgage, the interest rate remains the same throughout the entirety of the loan.
A variable-rate mortgage, in contrast, has a fluctuating interest rate created on a financial index. If the index rises or dips, your monthly payment increases or lowers as well.
Which mortgage approach makes the most financial sense is dependent upon on your individual circumstances and preferences. Some want to swiftly pay off a loan and opt for a 15-year mortgage. Others would rather lock in lower payments that allow more excess monthly income and choose a 30-year mortgage loan.
Your home is more than just an asset; it also embodies a momentous part of your personal lifestyle. Generally, how and where we live means something to us and our homes tend to reflect that meaning. Since the place we call home does carry personal significance, the financial factor of owning a home should be measured considerately.
Here are some things to keep in mind when thinking about homeownership:
Continually reevaluate your home to make sure it is meeting your needs.
Consider your time, income, and tax bracket and use them to find a mortgage and payment structure that works best for you.
Luxury vs. Needs
Luxury items and how we spend our leisure time can be just as important as where we live. What we buy and the activities we partake in are staples in our lifestyles- it is part of what makes us who we are and the lines between required needs and luxury have started to blur.
The list of necessities and luxuries changes with each individual but the thing that remains the same across the board is cost.
Let’s take a look at an item many people consider a luxury: a boat. Let us assume that the boat costs $100,000.00 to purchase. Now let’s guess that taxes on the boat, plus the cost of insurance, and docking and maintenance fees add up to about 20% of the purchase price. This means it could cost up to $20,000.00 a year to keep that boat in the water.
On the opposite side of the boat’s coin, that $100,000.00 could also be deposited into a high-yield savings account that would eventually grow into a positive cash flow rather than a negative.
Which decision we choose just depends on our lifestyle choices. Luxury items like boats may be an important part of your personal lifestyle just a savings account may be a part of it. However, the luxury boat has an opportunity cost that should always be taken into consideration. Some individuals prefer the boat, while others prefer the investment, and some would rather meet in the middle by purchasing a less expensive boat at $50,000.00 and investing the other $50,000.00.
Leisure vs. Needs
Much like luxury, leisure activities can create meaning in life. Over the past few years, people have started to rethink their budgets in order to apply more finances toward leisure. A few examples of this would be the tiny house movement and opting to share homeownership and/or rent responsibilities. It can also be found in those who to rent privately own homes rather than luxury hotels for their vacations. Money that is saved with some of these above options can then be used for investing.
For example, for a 2-week vacation, an individual may opt for a $100.00 per-night private house rental as opposed to a $300.00 per-night luxury hotel. This adds up to an extra $2,800.00 in savings. If you were to invest that $2,800.00 every year for the next 20 years at a 5% rate of return then you would end up with $100,000.00.
Finding the Balance
Just like opting for the smaller boat, these decisions can add up over time and lead to more financial security. This is the basis of asset allocation which is an investment approach that aims to balance risk and reward by allocating an individual’s assets according to goals, risk forbearance, and investment prospects.
Effectively managing your lifestyle means increased resources as you age while making room to enjoy some of those resources in the present.