LOUISE FAIRSAVE: Be wary of the golden handcuffs
FOR EASTER, while maintaining the current theme of securing your retirement, worthy money advice is to be wary of “golden handcuffs”.
Bright and shiny like a sunny Easter morning is the allure of wearing golden handcuffs. Yet, this attractive device is limiting to your financial well-being in the long term.
Golden handcuffs refers to the approach to living where we spend more than we should on luxuries, entertainment and other discretionary items. Then having developed a love for the resulting lifestyle, we become attached to spending more and more on what we want rather than what we need.
In fact, some high-income earners believe that the mark of academic or career success is the outward show of conspicuous consumption and social mobility. This attitude is grounded in thoughts like: “I am now a lawyer, so I should be able to afford this lifestyle”; “As a manager, I must have a home in the heights or the terraces”; “Wow! Thanks to that promotion and salary increase, I can now afford to live like the Joneses”, and “I should be able to afford a vehicle that costs more than my working-class neighbour”.
Such thinking, rather than rationally considering your specific needs, tends to lead you into spending more than is wise and thus reducing opportunities to save. Such loose thinking can lead you to end up definitively broke even before you reach retirement. Further, having overspent earlier and with minimal savings, there will be no way that you will be able to maintain such an extravagant lifestyle during retirement.
Another term for golden handcuffs is lifestyle inflation: you spend more than necessary to expand your lifestyle, you become attached to the look and feel of the changed lifestyle and you have figuratively stuck your hands out to be ‘golden handcuffed’. It is in your better interest to step off this debilitating treadmill of the mind and of wasted finances.
By now, you know that the only way to save and set aside funds for your retirement is to spend less than you earn, to live within your means. Yes, we have observed that Colonel Saunders developed and marketed his secret chicken recipe for Kentucky Fried Chicken well into the latter part of his working life. At that time, he had vastly inadequate retirement savings and so was driven by the need to supplement his retirement income and so fund an acceptable retirement. He went on to become significantly wealthy into his 70s and beyond.
Yet his success as an entrepreneur still rested on the sound rule of spending less than he earned. The difference is that he took the risks to fund that venture which eventually ended up providing him with far more than he was spending. He developed a highly successful business plan when he was well past 50 years old. Are you willing to count on doing the same? Can such an approach be common to many retirees? This is definitely not a recommended approach.
Beware of golden handcuffs: avoid unnecessarily increasing your level of spending just because you get a raise. Specifically, think carefully about changes that will increase your mortgage payment or your car loan instalment.
An increase in cash flowing out reduces your ability to build up an adequate emergency fund and to save towards retirement. Also, have you set aside enough savings toward your own development and/or the education of your children?
I am sure that living in grand style may be in your dearest dreams. However, be careful in considering your needs versus your wants over the long term. You can still find ways of enjoying the cash that you earn without locking yourself into a destructive lifestyle.
The key is to strive always to spend within your means, and so being in a position to set aside a suitable level of savings towards important longer term commitments in your life.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: Louisefairsave @nationnews.com This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.