Financial Literacy

Money is a central concern in our lives, influencing everything from our daily spending habits to our long-term plans and aspirations. Yet, for many of us, setting and pursuing financial priorities remains a challenge. We may feel pulled in different directions by competing demands on our resources or struggle to balance our short-term needs with our long-term goals.

In this series, we'll explore the complex web of factors that shape our financial decision-making and provide practical strategies for setting and achieving your financial priorities at every stage of life. Whether you're just starting in your career, navigating the challenges of midlife, or looking ahead to retirement, we'll offer valuable insights and actionable advice to help you make the most of your money.

We'll begin by examining some of the psychological and societal influences that can lead us to prioritize spending over saving, or to make financial choices that may not align with our deeper values and goals. By understanding these often-hidden pressures, we can develop greater self-awareness and take steps to assert control over our financial lives.

Next, we'll look at the concept of "conspicuous consumption" - the tendency to spend money on status symbols or luxury goods to signal wealth or success to others. While this behavior may temporarily boost our self-esteem, research suggests that prioritizing experiences over possessions and cultivating a sense of purpose and connection are more reliable paths to lasting happiness and fulfillment.

From there, we'll dive into the psychology of saving and explore practical strategies for building a robust nest egg. We'll examine the mental barriers that can stand in the way of effective saving, such as present bias and herd mentality, and offer tips for overcoming these obstacles and staying motivated on the path to financial security.

Of course, setting financial priorities isn't just about balancing spending and saving in the present moment - it's also about clarifying our long-term goals and creating a roadmap for achieving them over time. In our article on financial goal-setting, we'll walk through a step-by-step framework for identifying, prioritizing, and pursuing your financial aspirations with clarity and purpose.

Throughout our lives, our financial priorities naturally evolve in response to changing circumstances and life stages. We'll provide a decade-by-decade guide to the common financial considerations and milestones you may encounter from your 20s through your 50s and beyond, with practical tips for adjusting your strategies and staying on track toward your goals.

Finally, we'll explore the concept of values-based financial planning - the practice of aligning your spending and saving decisions with your deepest beliefs, passions, and priorities. By bringing greater intention and mindfulness to your financial choices, you can free yourself from the cycle of mindless consumption and create a rich life of meaning, purpose, and fulfillment.

By exploring these topics, we aim to provide a nuanced and practical guide to setting and pursuing your financial priorities with clarity, confidence, and purpose. The goal is to empower you to take control of your financial life and to make choices that align with your deepest values and aspirations. By understanding the forces that shape our financial behavior and developing practical strategies for managing competing priorities, we can cultivate a more intentional and fulfilling relationship with money at every stage of our lives.

Let's get started!

Picture this: You're browsing online or strolling through your favorite store when a shiny new gadget or a stylish piece of clothing catches your eye. You don't necessarily need it, and it's not exactly in your budget, but the urge to buy it is strong. What's driving this impulse? Is it a genuine desire for the item itself or something more profound?

As it turns out, our spending behavior is often shaped by a complex mix of psychological factors, societal pressures, and our culture's norms and expectations. By exploring these hidden influences, we can gain valuable insights into our own financial choices and develop strategies for managing our money to align with our true needs and values.

Psychological Factors in Overspending

At the most basic level, many purchasing decisions are driven by emotions rather than logic. "Retail therapy" is a real phenomenon - studies have shown that shopping can temporarily boost our mood and self-esteem, especially when we're sad, anxious, or stressed. The problem, of course, is that this emotional high is often fleeting, and the financial consequences can be lasting.

Compulsive spending, or "buying-shopping disorder," is an extreme example of this tendency. Like other addictive behaviors, it's often driven by a desire to escape negative feelings or fill an emotional void. Buying provides a sense of control and validation, but the relief is short-lived and may even lead to a cycle of debt and shame.

Even for those who don't struggle with compulsive spending, it's easy to fall into the trap of using purchases to manage our emotions. We might splurge on a fancy meal or a new outfit to celebrate a success or turn to online shopping as a distraction from boredom or loneliness. While these impulses are understandable, relying on consumption to regulate our moods can be a slippery slope.

Social Pressures and Expectations

Beyond our psychology, our spending behavior is also shaped by the norms and values of our culture. In a consumer society like ours, we're constantly bombarded with messages that equate success, happiness, and self-worth with acquiring material goods. From an early age, we learn to define ourselves and others by the brands we wear, the cars we drive, and the gadgets we own.

These societal pressures can be especially intense in the age of social media, where curating an aspirational image has become a full-time job for some. It's easy to compare ourselves to the highlight reels of our friends and influencers and feel like we need to keep up with their apparent level of consumption.

At work and in social settings, we may feel pressure to maintain a particular image or lifestyle to fit in or get ahead. The desire to keep up with our peers can drive us to spend beyond our means, whether on designer clothes, expensive dinners, or lavish vacations.

Even within our closest relationships, financial expectations can create tension and conflict. Couples may need help to align their spending priorities. At the same time, parents feel pressure to provide their children with the latest toys and experiences, even if it means sacrificing their own financial security.

Strategies for Managing Financial Pressures

So what can we do to resist these psychological and societal pressures and make financial choices that truly serve our needs and values? Here are a few strategies to consider:

• Cultivate self-awareness: Take time to reflect on your spending triggers and patterns. What emotions or situations tend to drive impulsive purchases? By bringing these tendencies into conscious awareness, we can develop strategies for managing them more effectively.

• Set clear financial goals: Having a clear sense of your short-term and long-term financial priorities can help you stay focused and motivated in the face of temptation. Whether it's paying off debt, saving for a down payment, or building a retirement fund, keeping your goals front and center can make it easier to resist impulsive spending.

• Practice mindful consumption: Before making a purchase, take a moment to check in with yourself. Ask: Do I really need this item? Will it bring lasting value and satisfaction to my life? Am I buying it for the right reasons? By cultivating a more intentional approach to consumption, we can break free from the cycle of emotional spending and make choices that align with our deeper values.

• Seek support and accountability: If you're struggling to manage financial pressures independently, don't hesitate to seek support from a trusted friend, family member, or professional. Joining a money management group or working with a financial therapist can provide valuable guidance and accountability as you work to develop healthier spending habits.

• Cultivate alternative sources of fulfillment: Rather than relying on material possessions to bring happiness and satisfaction, focus on cultivating meaningful experiences, relationships, and pursuits. Investing in hobbies, learning new skills, volunteering for a cause you care about, and spending quality time with loved ones can provide a deeper sense of purpose and fulfillment than any shopping spree.

By bringing awareness to the psychological and societal factors that drive our spending behavior and developing practical strategies for managing these pressures, we can take control of our financial lives and make choices that truly serve our long-term well-being. It's not always easy, but with patience, practice, and support, it is possible to cultivate a more intentional and empowered relationship with money.

In the age of social media and 24/7 advertising, it's easy to feel like we're constantly being judged by the brands we wear, the cars we drive, and the vacations we take. The pressure to keep up with the Joneses (or the Kardashians) is real. For many of us, it can lead to a never-ending cycle of conspicuous consumption - buying luxury goods and experiences to signal status and wealth to others.

On the surface, conspicuous consumption can seem like a harmless indulgence or a necessary part of navigating certain social and professional circles. After all, who doesn't want to feel respected and admired by their peers? However, as we'll explore in this article, pursuing status through material possessions comes with hidden costs - not just for our bank accounts but also for our psychological well-being and social relationships.

The Psychology of Conspicuous Consumption

Sociologist Thorstein Veblen first coined the concept of conspicuous consumption in his 1899 book "The Theory of the Leisure Class." Veblen argued that in a society where wealth determines status, people will often engage in lavish spending to signal their position in the social hierarchy. By consuming luxury goods and experiences visible to others, individuals can communicate their success and prestige without explicitly stating their income or net worth.

More than a century later, Veblen's insights are as relevant as ever. In a world where social media has made it easier than ever to curate and broadcast an enviable lifestyle, the pressure to engage in conspicuous consumption has only intensified. We see this play out in the rise of "influencer culture," where individuals are paid to promote products and experiences to their followers, creating an endless feedback loop of aspiration and acquisition.

At a psychological level, conspicuous consumption is often driven by a desire for social validation and acceptance. By aligning ourselves with specific brands or experiences, we signal our membership in desirable social groups and differentiate ourselves from those we perceive as lower status. This can provide a temporary boost to our self-esteem and sense of belonging, but it can also create a fragile sense of self-worth that is dependent on external markers of success.

The Social Costs of Conspicuous Consumption

Beyond the individual psychological toll, conspicuous consumption can also have negative impacts on our social relationships and communities. When we focus too much on keeping up appearances, we risk alienating friends and loved ones who may not share our priorities or who feel judged by our displays of wealth. We may also miss the more profound sense of connection and meaning from investing in experiences and relationships not tied to material possessions.

At a societal level, conspicuous consumption can exacerbate inequality and contribute to a culture of excess and waste. When the pursuit of luxury becomes an end in itself, we risk losing sight of the things that truly matter - like health, education, and environmental sustainability. We also create a system where those who cannot afford to keep up are left feeling inadequate or resentful, leading to social tension and division.

Finding Fulfillment Beyond Material Possessions

So, what's the alternative to conspicuous consumption? How can we find happiness and fulfillment without relying on external markers of status and success? Here are a few strategies to consider:

• Invest in experiences over things: Research has shown that spending money on experiences - like travel, learning new skills, or spending time with loved ones - tends to provide more lasting happiness than buying material possessions. Experiences become a part of our identity and create memories that we can cherish long after the moment has passed.

• Practice gratitude and mindfulness: Taking time to appreciate the good things in our lives - whether it's a supportive relationship, a meaningful career, or a beautiful sunset - can help shift our focus away from material desires and toward a deeper sense of contentment. Mindfulness and self-reflection can also help us stay grounded in our values and priorities rather than getting caught up in pursuing status.

• Cultivate a sense of purpose: When we clearly understand our passions and values and work toward meaningful goals, we're less likely to seek fulfillment through material possessions. Whether volunteering for a cause we care about, pursuing a creative project, or building stronger relationships with loved ones, having a sense of purpose can provide profound motivation and satisfaction.

• Practice conscious consumption: While there's nothing wrong with enjoying nice things in moderation, we can strive to be more mindful and intentional about our purchasing decisions. Before buying something, consider whether it aligns with your values and priorities and will truly enhance your life. Choosing quality over quantity and supporting brands that prioritize ethical and sustainable practices can also help us feel better about the impact of our consumption.

• Seek out diverse role models: Instead of comparing ourselves to the curated lifestyles we see on social media, seek out role models who embody a more holistic and balanced approach to success and fulfillment. Surround yourself with people who prioritize personal growth, community involvement, and authentic self-expression over material status symbols.

By shifting our focus away from conspicuous consumption and toward more meaningful sources of happiness and fulfillment, we can cultivate a healthier and more sustainable relationship with money and material possessions. It can be challenging to resist the pressure to keep up appearances. Still, by staying grounded in our values and cultivating a sense of purpose and gratitude, we can find a deeper sense of contentment and connection in our lives. 

Should a recent college graduate save for retirement or pay down student loans?

At first glance, it seems like an easy question. Retirement is decades away, while student loans typically require immediate attention. Yet by taking a few smart steps, you may be able to get the best of both worlds - paying off your loans while getting an early start on retirement.

With that goal in mind, let's review some of the most important angles to consider.

The Importance of Timely Student Loan Repayment

First, let's establish that you cannot simply ignore your student loans to focus on retirement saving. Missing a single payment can damage your credit score. If you miss nine payments, you'll enter default, a serious financial outcome from which it may take years to recover. Further complicating matters, student loans are rarely dischargeable in bankruptcy.

That said, it's vitally important to stay on top of your loan payments. Make sure you know exactly how much you owe, who your lenders are and how you plan to repay the balance. You can sometimes place your loans in deferral or forbearance, but these options are not recommended unless you're in dire straits, as the interest on your loans keeps accruing.

If your payments are simply too large to leave you anything left to save or invest, there may be other options to explore. There are several federal loan repayment programs available to qualified applicants. These programs can reduce your monthly payment based on your income, or even discharge your debt after a certain number of years, should you meet certain qualifications. If you have multiple loans, you may also consider consolidation. 

If you don't qualify for any of these programs, you'll likely need to increase your income, or carve enough money out of your budget to start saving. 

Though timely payment of student loans is critical, it's important to keep things in context. You don't want to accelerate your payments to such a degree that you miss out entirely on the tax advantages and company donations offered through most retirement plans.

Most importantly, you don't want to squander the number one savings asset most college grads have - time.

Why Saving Early Is So Important

Saving money for retirement isn't always a top priority for recent college grads. After all, your salary hasn't had time to grow very much, and student loans have to be addressed.

Yet in many ways, this is the ideal time to get started. Many recent grads have relatively few expenses. Those without children, especially, are likely to have more disposable income.

By routing some of this money into your retirement savings now, you can take full advantage of compound interest. When combined with time, compounded interest is the single most valuable money-generating tool available.  For example, if you invest $10,000 at a rate of seven-percent, you'll have $10,700 one year later. Not bad, but not life changing, right?

Yet over a long enough timeline that money grows exponentially. After 40 years, your $10,000 would be worth just under $150,000.

By starting to save in your 20s, you get the full advantage of compounded interest. If you wait until you're 40, the benefits are dramatically lower, simply because there's less time for the interest to compound.

Getting Started Today

Retirement savings and student loan payments are two of most critically important financial areas for recent graduates. Ideally, both should be given priority.

Remember, too, that you can start small.  If you can only afford to save one-percent of your income, that's still better than not saving at all.

All parents want to put their children in the best possible position to succeed – and securing a college degree is typically part of that process. Studies show that workers with a bachelor’s degree typically earn far more than their non-degreed counterparts – about 75-percent more over the course of a lifetime. They are also far less likely to experience prolonged bouts of unemployment.

Helping your child secure a valuable college degree may provide little solace, however, if it leaves you scraping by in your retirement years. Skyrocketing student loan debt, and the rising costs of higher education in general, are both spurring more parents to use their retirement nest egg to finance their children’s college education. A Sallie Mae survey of parents found that seven-percent are using retirement funds to pay for a child’s higher education - a figure that’s up from previous years.

Finance experts say parents should be aware of the long-term financial impact of such a move. Pulling money early from retirement funds can expose account holders to penalties, taxes and the possibility of making it more difficult to recoup money spent.

The consensus among most economists is to avoid raiding retirement funds to pay for college. Unfortunately, that’s not always possible. With that in mind, let’s review some of the most important information to know regarding retirement-funded college educations.

The Drawbacks of Early 401(K) Withdrawals

Most experts agree that taking a hardship withdrawal from your 401(k) is the worst option available. If you’re under 59 and a half, you’ll face a 10-percent penalty - in addition to owing taxes on your withdrawal.

Additionally, you may not be able to contribute to your 401(k) for at least six months. That means you’ll lose out on employer matches and accruing interest.

Using an IRA

Early Individual Retirement Account (IRA) withdrawals used to fund college aren't penalized like hardship withdrawals from 401(k) accounts. They can also be used for everything from tuition to books to room and board - but you'll still face taxes on any amount withdrawn.

Additionally, an IRA withdrawal may reduce your child’s eligibility for some financial aid programs, so it's important to review the situation closely.

Borrowing From a 401k

Taking out a 401(k) loan against your account is another option. It offers a significant advantage: if the loan is paid back within five years with interest, there are no taxes and penalties due. The downside is the payments are often steep, as they must be paid back in five years.

Generally, most 401(k) plans allow as much as $50,000 to be taken as a loan. If the monthly payments can be met, this could represent a safe option. Yet if the loan is not paid back in five years, or you switch jobs, you’ll be subject to taxes and penalties.

The Bottom Line

If you avoid paying taxes and penalties, by borrowing against your plan or using an IRA, it may seem like there are few drawbacks for the borrower. Yet financial experts say that’s not entirely correct.

Those who choose these options are still not making money on the cash withdrawn from their account. Economists call this “opportunity cost.”

When considering tapping your retirement funds for college payments, it’s also important to remember that student loans are often tax-deductible and typically viewed as “good debt,” by experts.

While financing a child’s college education through a retirement account is rarely anyone’s first choice, it’s possible to minimize the financial fallout by incorporating the information listed above.  

As we move through different stages of life, our financial priorities naturally shift and evolve. What may have seemed like a distant concern in our 20s, such as saving for retirement or paying for a child's education, can quickly become a pressing reality as we enter our 30s, 40s, and beyond. By understanding how our financial needs and goals change over time, we can make more informed decisions about allocating our resources and preparing for the future.

In this article, we'll examine some of the key financial priorities to consider across different decades of life, from early adulthood to retirement. While everyone's situation is unique, these general guidelines can help you navigate the changing landscape of your financial journey.

Your 20s: Building a Foundation

For many people, their 20s are a time of significant personal and professional growth. You may be starting your career, navigating student loan debt, and learning to manage your finances independently for the first time. While retirement may seem like a distant concern, the financial habits and decisions you make in this decade can profoundly impact your long-term financial security.

Key financial priorities in your 20s may include:

• Creating a budget: Tracking your income and expenses can help you live within your means, avoid unnecessary debt, and start saving for the future.

• Building an emergency fund: Aim to save enough money to cover 3-6 months' living expenses in case of unexpected job loss, medical bills, or other financial setbacks.

• Paying off high-interest debt: If you have credit card balances or other high-interest debt, make a plan to pay it off as quickly as possible to avoid accruing excessive interest charges.

• Starting to save for retirement: Even if you can only afford to contribute a small percentage of your income, starting to save for retirement early can give your money more time to grow through compound interest.

Your 30s: Balancing Competing Priorities

As you enter your 30s, you may find yourself juggling a growing number of financial responsibilities. You may be getting married, buying a home, starting a family, or advancing your career. At the same time, you may still be paying off student loans or other debt from your 20s while also trying to save for the future.

Key financial priorities in your 30s may include:

• Increasing your retirement savings: As your income grows, aim to increase your contributions to your 401(k), IRA, or other retirement accounts. If possible, try to save at least 10-15% of your income for retirement.

• Buying a home: If you plan to buy a home, start saving for a down payment and researching mortgage options. Be sure to factor in additional costs like property taxes, insurance, and maintenance.

• Starting a family: If you're planning to have children, start thinking about the costs of childcare, education, and other expenses. Consider opening a 529 college savings plan to start saving for your child's future education.

• Protecting your income: As your income and responsibilities grow, consider purchasing disability insurance to protect your earning potential in case of illness or injury.

Your 40s: Hitting Your Stride

By your 40s, you may be hitting your peak earning years and feeling more financially stable. However, you may face new challenges, such as paying for your children's education or caring for aging parents. Staying focused on your long-term financial goals while managing these competing priorities is essential.

Key financial priorities in your 40s may include:

• Maximizing your retirement savings: If you haven't already, consider maximizing your contributions to your retirement accounts. You may also explore additional investment opportunities outside of your employer-sponsored plan.

• Paying for your children's education: If you have children nearing college age, start exploring financial aid options and consider how much you can realistically contribute to their education costs without jeopardizing your retirement savings.

• Managing your debt: If you still have student loans, credit card balances, or other debt, plan to pay it off as quickly as possible to free up more cash flow for saving and investing.

• Caring for aging parents: If you have aging parents who may need financial support, start having conversations early about their needs and how you can help while still protecting your own financial security.

Your 50s and Beyond: Preparing for Retirement

As you enter your 50s and beyond, retirement is no longer a distant concept but a fast-approaching reality. This is a time to assess your progress toward your retirement goals, make any necessary adjustments, and start planning to transition to this new phase of life.

Key financial priorities in your 50s and beyond may include:

• Assessing your retirement readiness: Review your retirement savings, projected Social Security benefits, and other sources of income to determine if you're on track to meet your retirement goals. If necessary, consider increasing your savings or adjusting your retirement timeline.

• Paying off your mortgage: Aim to pay off your mortgage before retirement to reduce your monthly expenses and free up more cash flow.

• Exploring healthcare options: Start researching your healthcare options in retirement, including Medicare and long-term care insurance. Consider setting aside funds specifically for healthcare expenses.

• Creating a retirement budget: Develop a realistic budget for your retirement years, considering your projected income, expenses, and desired lifestyle. Consider working with a financial advisor to create a comprehensive retirement plan.

• Reviewing your estate plan: Make sure your will, power of attorney, and other estate planning documents are up to date and reflect your current wishes. Consider discussing your plans with your family to ensure everyone is on the same page.

The Takeaway

Navigating life's changing financial landscape can be challenging. Still, staying focused on your priorities and making informed decisions at each stage can build a strong foundation for long-term financial security. Remember, it's never too early or too late to start taking control of your finances and working towards your goals. You can achieve financial success at every age by breaking down your journey into manageable steps and staying committed to your vision.