We all have dreams.
The colonial with an in-ground pool. The once-in-a-lifetime trip to Bora Bora. The weekends spent holed up in a delightful cabin in the woods.
Get started with a free financial assessment.
Get started with a free financial assessment.
And they're all good dreams to have, but here's a question: What are you willing to give up to make that dream a reality?
We're talking about financial trade-offs—or the willingness to sacrifice in one area of your money life to help bring to fruition what matters to you most.
The kind of strategic trade-offs that these three people are making for the long haul—and sharing with the rest of us dreamers.
And since we always like to dig a bit deeper, we also tapped Certified Financial Planners™ Jennifer S. Faherty and LearnVest's own Alyssa Barton to help assess if the trio is on a good course toward fulfilling their individual dreams.
"I'm Only Having One Kid."
Who: Theresa Riley*, 29, freelance writer, McKinney, Texas
The Story Behind Her Trade-Off ... "When I was growing up, my family was always struggling to make ends meet, and helping to pay for college was something my parents simply couldn't afford. But even though I had scholarships and worked two jobs, I still graduated with a mountain of student loan debt.
Thanks to the financial instability that marked my childhood, I was hesitant about having kids.
But when my husband, Marc, and I had our daughter eight years ago, we couldn't have been happier. Being her mother and watching her grow has been an incredible joy, so much so that we toyed with the idea of having another one—but ultimately decided against it.
I'm not sure I'm willing to sacrifice our current lifestyle.
Opting to have just one child has provided a lot of financial comfort—between my earnings and Marc's salary as a video game developer, we bring in almost $100,000. We can make our mortgage and car payments easily, with money to spare for activities for our daughter and an annual family vacation.
Another baby would be a huge change for us financially. The day care bill alone would be like a second mortgage. It would also translate into staycations, and put us behind on our financial goals.
We'd like to start a college fund for our daughter, knock out my $30,000 in student loans, and grow our emergency savings, which is currently about $2,000.
Marc already contributes up to the 401(k) match provided by his employer, but as a freelancer I have yet to set aside money to further shore up our nest egg.
As much as part of me would love to have another baby, I just don't think we're financially up for it."
If they still have lingering thoughts about baby number two, Faherty suggests evaluating their career trajectories—specifically, whether they anticipate their salaries will grow.
What the CFP®s Think ... Faherty commends Theresa's approach, noting that not all parents do a thorough cost-benefit analysis before having a baby. “She’s very smart to be thoughtful on the decision and not just rush into it,” she says.
And while it's true that expanding a family is about more than just dollars and cents, it still does come with a hefty price tag that can impact your bottom line—and lifestyle.
According to the U.S. Department of Agriculture, the average cost of raising a child through the age of 18 now exceeds $245,000. And that's not factoring in college costs, which can range from about $19,000 a year (in-state at a public school) to over $42,000 for a private education, based on data from the College Board.
But expenses are only one side of the equation—income also comes into play.
So if Theresa and Marc still have lingering thoughts about possibly welcoming baby number two, Faherty suggests evaluating their career trajectories—specifically, whether they anticipate their salaries will grow—and combing over their budget to see where they can trim costs.
One thing Faherty doesn’t feel belongs in their budget right now: contributing to a 529 college savings plan.
Barton agrees, noting that the couple needs to focus on building up their emergency savings first. She recommends aiming to save the equivalent of six months of the highest earner’s take-home pay. And given that Theresa’s income as a freelancer may be variable, Barton stresses that it’s important for the couple to address this goal quickly.
As they approach that six-month rainy-day fund target—and assuming Theresa is meeting her minimum student loan payments—Barton says the next priority should be for Theresa to start putting money toward their nest egg.
Since she doesn't have the option of contributing to a 401(k), Faherty suggests Theresa open a Roth IRA to take advantage of tax-free growth.
"I Sold My Car—and Now Bike to Work."
Who: Drew Farnsworth, 33, data center infrastructure consultant and designer, Columbus, Pa.
The Story Behind His Trade-Off ... "A little over a year ago, my '99 Jetta officially died.
The original plan was to buy a new car, but with my wife, Colleen, in between jobs as a textile designer at the time, we were nervous about taking on a new car payment. Plus, we were talking about starting a family and wanted to make sure we were as financially prepared as possible.
That's when we decided to downsize to one car. Colleen has continued using her Nissan Cube, which comes with a $280 monthly payment, while I’ve opted to bike to and from the office.
I’ve always enjoyed biking as a hobby, so I invested in a high-quality bike for about $1,000. I was ready to hit the pavement.
My commute, which took 25 minutes by car, now takes about 40. And if the weather’s bad, I carpool with Colleen. An added bonus: I get in some exercise, while also doing my part to reduce my carbon footprint.
This lifestyle is really working for us: Since we haven't been saddled with a new car payment—not to mention the costs of gas, insurance, maintenance and repairs—we've been able to funnel more money into our savings. We've doubled our emergency fund to about $30,000, and I even maxed out my 401(k) for this year.
These savings have turned out to be really important.
"In the short term, this is a great solution, but it might only be a short-term one. If they have a growing family, it might not be a trade-off they can continue to make."
Although Colleen landed a new job a few months ago that pays $65,000, we welcomed our first child shortly afterward—and her 14-week maternity leave is unpaid. So we're relying on my $52,000 salary to get us over the hump, and having a healthy emergency fund really provides peace of mind.
Once Colleen returns to work, we plan to direct more money toward paying off our joint student loan debt, which is just over $50,000."
What the CFP®s Think ... Faherty is a big fan of Drew’s transition to full-time cyclist, and how it’s positively influenced his family's bottom line.
"I love the fact that they're putting the money into building up their emergency savings—especially [given] where they are in their lives," she says.
And Barton notes that with a rainy-day fund of $30,000, they’ve likely reached the equivalent of six months of Colleen's take-home pay—the higher earner—so they can use the extra savings from their trade-off to meet other goals.
Since Drew is maxing out his 401(k), says Barton, the next step would be for Colleen to take advantage of an employer match, if offered.
"From there, I’d recommend they each increase their retirement account contributions in small doses—say, 1% every six months—until they meet their savings target," she says.
As for their student debt, Barton says they should prioritize any private loans, which offer less flexibility than federal ones. She suggests putting extra cash toward the highest-interest-rate loan, and paying the minimums on the others.
When it comes to college for their little one, Faherty echoes the advice she gave Theresa: emergency funds, paying down debt, and retirement should come first.
Of course, that doesn't mean forgoing saving for college entirely. Faherty says they could consider opening a 529 college savings plan using any cash they received at their baby’s birth, but holding off on their own contributions until they're on firmer financial ground.
And as Faherty points out, time is of the essence—at least as it pertains to Drew's one-car-one-bicycle lifestyle.
"In the short term this is a great solution, but it might only be a short-term one," she says." If they have a growing family, and [as] Drew gets older, it might not be a trade-off they can continue to make."
"I Packed Up and Moved to a Cheaper City."
Who: Anna Rice, 26, PR account executive, Boston
The Story Behind Her Trade-Off ... "Four years working in New York City's fashion industry taught me it's nearly impossible to save when a huge chunk of your paycheck goes to rent. My one-bedroom was $1,600 a month!
Living in one of the world’s priciest cities was preventing me from fulfilling my passion for globetrotting—and I knew I had to make a change if I wanted to experience the travel adventures of my dreams.
So earlier this year, I left New York behind to settle in a cheaper city—my hometown of Boston. I stayed with my parents for a few months to stockpile some cash, and now live in an apartment with a roommate, paying $1,050 in rent.
Another wise move was to take a PR job in the tech sector, which came with a 10% salary increase and unlimited vacation days. I really like my job, and the fact that I don't have to give up my career to see the world, thanks to my company’s generous paid-time-off policies.
Moving to a cheaper city, while cutting my expenses and increasing my earnings is paying off big time. I'm able to allocate $350 a month for travel, which allows me to take trips I wouldn’t have been able to swing before.
So far I’ve crossed Colombia, San Francisco and Chicago off my list—with Iceland and Paris up next.
But beyond boosting my travel funds, I'm also chipping away at my student loans and credit card debt, which total about $28,000.
I'm working on my savings too. I've gotten my emergency fund up to about a month's worth of expenses. My company matches 3% of my salary to my 401(k), and while I'm only kicking in 1% now, I plan on upping my portion to 7% by the end of this year."
“I’d encourage her to put her cards away until they are paid off. Is earning 1% back worth paying 18%-plus in interest?”
What the CFP®s Think ... Faherty feels Anna is making some savvy money moves.
“It was smart to lower her expenses by first moving in with her parents, and then going with [an apartment] that's less expensive,” she says. "But I see it as aligning her budget more with her goals, which is not really sacrificing.”
The fact that Anna also increased her salary in the process means she likely has extra room in her budget. So Faherty would like Anna to continue to grow her emergency fund—for example, a $2,000 balance won't go far if disaster strikes—and follow through on her plan to increase her 401(k) contributions and reduce her debt.
If she hasn’t done so already, Barton says Anna should figure out a dedicated monthly amount to put toward each goal. But first, Barton recommends having at least one month's worth of take-home pay in her emergency fund before tackling any other goals.
“Once Anna hits that one-month milestone, she can work toward incrementally building up her emergency fund to six months of pay, while also paying down her debt, starting with her highest-interest credit card," she says.
Barton adds that Anna should also try to cut back on using her plastic—even if it means giving up travel reward points.
“While many people are drawn to the idea of reward points, using your cards while trying to pay them down can complicate your cash flow and slow down progress. So I’d encourage her to put her cards away until they are fully paid off," she says. "Besides, is earning 1% back really worth paying 18%-plus in interest?”
*Last name has been changed.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.