BALANCE SAVING AND SPENDING

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Everyone has a unique personality, including their views about money.

That being said, you may recognize a few familiar stereotypes or patterns around how people save and/or spend.

We all know an aggressive saver who is always funneling dollars into retirement accounts or taking full advantage of any opportunity to invest. Their income is steady or possibly great, but it may not be apparent by observing their lifestyle. They live a simple life.This person may be “the millionaire next door” but in cases where they seek to ruthlessly reduce expenses can be seen as a cheapskate or miser.

Then there is the person with a high income AND high expenses. They probably aren’t bad at saving, but their efforts to save and invest are not their most prominent characteristic. Their spending habits and the corresponding luxurious lifestyle are more obvious components of their life.

Neither of these archetypes is necessarily better (or worse) than the other. The cheapskate who saves a huge percentage of their income is just as unpopular as the spendthrift who can't find a way to invest any of their income. Financially speaking, the best outcome in life does not lie on or near the extremes of close-fisted saving or careless spending. As with most things, balance is best.

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Financial Well-Being

In its most simple definition/form, financial-well being is about having as much money as you need when you need it. In a state of financial wellness, there is little or no stress. You don’t spend time worrying about every miniscule aspect of your financial life.

Some people with a high sense of financial wellness would be classified as wealthy. Their brilliant idea, hard work, and immense amount of luck provided them with a degree of wealth few can even imagine.

Others earn a steady income, save/invest diligently, and spend thoughtfully. Although these folks may never reach extreme levels of wealth, but they too can easily have a high financial wellness.

Low financial well-being expands beyond the poor. The extravagant spender who spends more than they earn and the miser whose frugality deprives themselves, their family, and those in need are not financially well either.

Certain points in life cause one’s financial wellness become more evident and important.

When you are retired or financially independent (an alternative to retirement where you have the optionality to do what you want), your financial wellness should be a priority.

The Self-Control Dichotomy

Self-control is a rare trait. Although it is highly desired, few people can truly exhibit self-control on a regular basis.

Those with too little self-control do not have the capacity for delayed gratification. The desire to spend today is overwhelming. It is much too difficult to save for tomorrow.

These folks are the spenders we see out and about. Whether through nature or nurture, saving is difficult and spending is easy for this type of person. There is a great deal of enjoyment in purchasing something new or using funds for pure enjoyment.

Too much self-control can be just as detrimental as too little self-control. For someone with an excessive amount of self-control, spending may be painful even when it is in their best interest.

Some people are naturally predisposed to save more and spend less. There is a great sense of satisfaction in saving and watching account balances grow over time.

Either extreme in regards to self-control is lacking a high degree of financial wellness.

Too much spending makes life feel like a hamster wheel. You can't catch your breath and find extra money to stow away for the future. Your current life feels exciting, but it is solely supported by your earned income. Will you have enough funds saved for retirement to keep up the torrid pace of spending?

Too much saving steals away from some of life's many joys. You are more focused on saving than giving to others. You couldn't imagine spending money on yourself or your family. Life becomes about numbers on a monthly statement instead of enjoying each day.

Balance may be hard to achieve but is still a worthy goal.

Places to Strike a Balance

1 - Most people spend less in the later stages of retirement than expected.

Forecasting spending in retirement is about as difficult as predicting the weather a year from now. You might be able to make a few conjectures in regards to the season or the average high/low temperatures but determining an exact temperature will be all but impossible. Spending in retirement is much the same - an educated guess.

Generally speaking, spending will be mostly flat or slightly higher during the first few years of retirement. There may be a few one-time purchases/expenses to set up the new lifestyle (e.g., a new vehicle, a boat, a camper, updating a home, replacing a roof, etc.) or some spending due to pent up demand in this early stage.

After the initial uptick, spending is on a slow and steady downtrend throughout the rest of retirement/life. A favorite resource of The Wealth Span, SmartAsset, projects that spending falls roughly 1% each year in retirement.

Most people assume that expenses overall will increase, mostly due to increased travel or possibly medical related expenses. This may be true initially but generally, overall spending will decrease, especially later on.

2 - Spending in retirement is a natural outcome after years of saving.

You have finished saving, and now it is time to spend. You shouldn’t feel guilty or self-conscious about any purchase or use of funds.

It may be difficult at first (especially for the saver) but transitioning to a spending mindset is one of the many components of living a fulfilling retirement. Those attempting a lifestyle of financial independence may require extra planning and thought but spending will still be important.

The reason you saved was to support a lifestyle in retirement that you dreamed about for years. In order to fulfill this dream, you must start to spend.

3 - Now is better than never.

There is no correct way to use money. Your preferred methods of spending during retirement/financial independence should be free from judgment (by me, you, and others). Once again, there is no reason to feel guilty about the way you spend money.

Regardless of how you choose to use your income/financial assets in retirement, it may be worthwhile to actually experience or witness it. Although preserving capital and assets for the next generation may be a priority for some, you should be free to spend on yourself, provide for your family, or contribute to a cause.

You can travel the world with enthusiasm or purchase a vacation home to spend extra time with family. It may be enjoyable to watch your children and grandchildren purchase a home for themselves while you are still alive. You may wish to witness the ribbon cutting ceremony of a building which was built (in part or whole) due to your contributions.

You should reap the benefits of your hard work and saving. The greatest reward may be experienced and/or watching the impact of your savings with your own eyes.

4 - Understanding the timing of retirement income and spending.

When you are living and spending from your “nest egg” (total financial assets), it is important to consider the timing of withdrawals from your overall portfolio.

When the market (and consequently your total assets) is down significantly, each withdrawal in terms of dollars will cost a greater number of shares.

A common “guardrails strategy” could help manage spending in retirement/financial independence. Essentially, there are certain predefined thresholds that may allow for greater spending (if the market is up) or carefully limit spending (if the market is down).

These guardrails or thresholds are not necessarily related to market performance or your overall assets. Your spending in retirement is not set in stone and will naturally fluctuate from year to year.

Using guardrails ties your spending to parameters specific to you and your financial circumstances.

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TL;DR

The transition from working life to retired life (or financial independence) is accompanied by a transition from saving to spending.

At any stage of life, you should strive to achieve financial wellness by balancing your saving and spending.

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Do you have a high level of financial wellness, easily balancing saving and spending? Do you know someone who does not?

Share this post with them and give them a head start in becoming financially well.