Balancing Current Lifestyle Needs with Future Financial Goals: A Guide to Allocating Your Income

As your income and net worth rise, you typically have more flexibility financially to upgrade your lifestyle and save for future financial goals. But how do you know how much money to allocate to each?

Indeed, addressing your immediate financial wants without compromising your longer-term goals can be a delicate balancing act. Fortunately, there are practical tips and rules of thumb you can follow to allocate your income accordingly.

Needs vs. Goals: Understanding Your Financial Objectives

Identifying your current financial needs and future goals is a key aspect of financial planning. Yet knowing how to prioritize your needs and goals can be challenging.

Financial needs generally refer to your immediate expenses and obligations, including essential living costs, discretionary expenses, and debt repayments. Future financial goals, on the other hand, are longer-term objectives you aim to achieve, such as buying a home, saving for your child’s education, or building a retirement nest egg.

The key to effectively prioritizing your needs and goals lies in striking a balance between living comfortably now while successfully preparing for the future.

In some cases, the 50/30/20 rule can be a helpful starting point for divvying up your paycheck. This rule of thumb says you should aim to spend 50% of your income on necessities, 30% on discretionary expenses, and save or invest the last 20%.

However, as your income increases, you may not need to allocate half of your paycheck to necessities. Thus, the more pressing concern often becomes how to balance today’s wants with tomorrow’s aspirations.

5 Tips for Balancing Today’s Lifestyle Needs with Future Financial Goals

#1: Take Inventory of Your Personal Values

Your values are the core beliefs that guide your behaviors and choices. Thus, understanding your personal values can be an effective first step when it comes to effective financial decision-making.

For example, if you value travel and adventure, you may allocate more of your income toward these passions and less toward daily living accommodations. But if security and freedom are more important to you, you may live more modestly today so you can put more money toward future financial goals.

Meanwhile, many people value having a family of their own. If you have children or plan to one day, you may need to prioritize their needs and ambitions as well.

To identify your financial priorities, start by making a list of your personal values. If you aren’t sure what your values are, consider taking a free online Personal Values Assessment.

Then, evaluate whether your current financial habits align with these values. If there’s a mismatch, consider adjusting your spending or saving habits to better reflect what you believe is important.

Ultimately, this exercise can help you make financial decisions that better serve you and the beliefs you hold dear. When you allocate your income accordingly, your choices feel more intentional and less like a sacrifice.

#2: Spend More Intentionally

Creating a budget can be an effective way to divvy your income between current needs and future goals. However, sticking to a budget long-term often proves challenging.

By deciding to spend more intentionally, you can make smarter choices with your income without putting excessive constraints on yourself.

For instance, spending intentionally helps you objectively distinguish between needs and wants. This can help you avoid unnecessary impulse purchases and overspending.

Moreover, spending more purposefully can improve your overall financial well-being. By being mindful of your expenditures, you can live within your means and avoid accumulating unnecessary debt.

In addition, it can be easy to deplete your discretionary income at the expense of longer-term objectives when you’re unaware of your spending habits. Spending intentionally, on the other hand, helps ensure you’re saving and investing enough of your earnings to achieve your financial goals and aspirations.

Lastly, spending more intentionally allows for greater financial flexibility in the long run. When you’re in control of where and how you allocate your money, you can adapt more easily as your circumstances and financial objectives evolve.

#3: Beware of Lifestyle Inflation

It’s natural for your cost of living to increase as your income grows. Financial professionals often refer to this phenomenon as lifestyle creep or lifestyle inflation.

There’s nothing wrong with enjoying the fruits of your labor and upgrading your lifestyle as your financial means allow. However, lifestyle inflation becomes problematic when it limits your ability to build lasting wealth.

For example, lifestyle creep can compromise your financial security if your new cost of living begins to match or outpace your income. This leaves little to no cushion to pay off debt, build your cash reserves, and save and invest for future goals.

In extreme cases, lifestyle inflation can cause you to live paycheck to paycheck even though you’re earning a higher income. In fact, 49% of Americans making over $100,000 report living paycheck to paycheck, according to a recent study from PYMTS and LendingClub.

Thus, it’s important to be aware of lifestyle creep and keep it in check as your income grows. Otherwise, your immediate lifestyle needs may prevent you from planning for longer-term financial goals and aspirations.

#4: Prioritize Your Debts

As you balance your near-term financial needs with future goals, understanding the difference between good and bad debt can help you allocate your income more effectively. Some types of debt, like mortgages and student loans, can benefit your financial well-being if you use them to finance an investment that can potentially appreciate in value over time.

Meanwhile, bad debts tend to make it easier to make purchases that you can’t afford or don’t need. High-interest credit card debt, for example, can quickly chip away at your financial health if it snowballs out of control.

Ultimately, how you prioritize debt among your various financial objectives depends on your personal circumstances and values. However, being mindful of good debt versus bad debt can help you use debt to your advantage rather than to your detriment.

#5: Keep Your Options Open by Maintaining Strong Credit

Lastly, many people don’t realize how important their credit score can be when it comes to achieving their financial goals. While credit can be an issue if it causes you to live beyond your means, a strong credit score can also give you access to better interest rates on loans and credit cards, which can save you money in the long run.

At the same time, a strong credit score can provide additional flexibility when balancing your immediate financial needs with longer-term goals.

For example, if the interest rate on your mortgage is relatively low, paying off your mortgage ahead of schedule may not matter as much as it would if your interest rate was in the double digits. Instead, you may be able to earn a higher rate of return by investing your cash and continuing to make the minimum monthly payments on your mortgage.

In other words, having access to affordable credit often allows you to make more favorable trade-offs when it comes to allocating your income. By managing your debt responsibly and maintaining a strong credit score, you can keep your options open for future financial opportunities.

A Comprehensive Financial Plan Can Be Your Path to Success

Balancing your lifestyle needs with future financial goals can be a daunting task. However, with careful planning and expert guidance, you can navigate your financial journey with confidence and make the most of your hard-earned income.

SageMint Wealth can help you develop a comprehensive financial plan that reflects your personal values and goals. Our approach gives you a framework for making financial decisions that serve your best interests today and tomorrow.

To learn more about how we help our clients achieve their financial goals and see if we may be the right fit for your financial planning needs, please contact us.