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  • Writer's pictureZachP

#18. What Is FOMO And How To Avoid It While Saving For Retirement

Updated: Jan 22, 2023


FOMO is short for "fear of missing out." FOMO causes a lot of unnecessary stress mentally and financially. Some examples of FOMO in the savings world include knowing you need to save money but still choosing to go out with friends or go on vacation. Common responses to choosing to spend money to avoid FOMO are "you only live once" or "you are only young for a short period of time."


Balancing knowing when to spend money on experiences or things versus needing to save or invest that money is tricky. This balancing act is personal and specific to each person and their situation. There is not a one size fits all way to balance these competing themes (needing to save money vs. not wanting to miss out on enjoying life).


No matter how you choose to balance these competing themes, FOMO, or fear in general, does not need to be a part of the decision making process. Here are some tips/strategies I use to make better decisions on when I should save money versus when I should spend money on bigger purchases:


One - Ignore peer pressure.


Peer pressure can be hard to recognize sometimes. The most common form of peer pressure is when you are a teenager and other peers are trying to get you to break a rule. A tougher type of peer pressure is when your friends live their lives a certain way that seems attractive, and because of this you want to be like them.


An example of this is having a group of friends who always drive nice and newer cars. You notice that your friends seem happy all the time as well. You have no idea about their money situation, but you assume they must be doing well financially because of their car and appearance of being happy all the time. So, what do you do? You buy or lease a brand new car to fit in.


Making purchases because of peer pressure should not be your goal.


Two - Identify "why" you want to spend the money.


Sticking to buying the new car example, figure out why you want a new car. Is your car 15 years old and having to go to the mechanic once a month? Are you having a second or third child and need a larger vehicle? Or is your current car fine, but all your friends own a Tesla?


Knowing why you want to make a purchase is a powerful tool to have. If you determine that you only want to buy the new Tesla because your friend Pete has one, then you should avoid making that purchase.


Three - Decide whether you can actually afford to make the purchase.


Once you have determined why you want to spend the money, and your "why" is sincere and legit, now you must decide whether you can afford it.


First, figure out whether your current budget allows for any discretionary spending. Here is how we budget. If you currently do not have any discretionary spending available in your budget due to life circumstances, then you must think very hard whether you should spend the money.


Four - So you can sleep at night, find out how much money you will actually lose in the long run.


As an example, let's say you make a gross monthly salary of $5,000 and have a savings rate of 30% ($1,500). To be able to make the purchase you want, you will need to drop your savings rate for 3 months down to 20% ($1,000). How much money will you actually be missing out long term?


If you invested $4,500 over three months and then let it grow for 20 years, at a yearly 7% rate of return you would end up with $17,413.58. However, if you invested $3,000 over those three months instead and let that grow for 20 years, at a yearly 7% rate of return you would end up with $11,609.05. Therefore, if you chose to lower your savings rate for three months in this scenario, not investing the extra $1,500 will cost you $5,804.53 in retirement.


I use this investment calculator at calculator.net to help run these scenarios when they come up for me. (I receive no money if you click on any links in this article, not even a simple thank you.)


Five - Assuming you can afford it, determine whether spending the money is worth it.


This is the ultimate question. After you have determined your why, figured out that you can afford it, and calculated how much money the decision will cost your future self, is the purchase actually worth it?


You may very well determine that spending $1,500 today on a purchase is worth the $5,804.53 it will cost you in retirement. Life is short, and spending money on things you truly want can bring you a lot of joy.


I find this especially true on things that are age specific. In other words, spending this money to take our kids to Disney World when they are around 8 years old would be far more important than spending the money to go vacation at a beach. Both are fun experiences, but Disney World is a more time sensitive adventure than vacationing at a beach.


Summary


The five tips/strategies are:

  1. Ignore peer pressure.

  2. Identify "why" you want to spend the money.

  3. Decide whether you can actually afford to make the purchase.

  4. Find out how much money you will actually lose in the long run.

  5. Determine whether spending the money is worth it.

I hope these tips will help you avoid making financial decisions because of a fear of missing out (or FOMO). Companies, especially life insurance companies, utilize the fear tactic all too often. Take fear off the table when making big purchases. This will allow you to live a happier and healthier life.


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