The balance between Saving and Spending

JC Project Freedom Journey Towards Financial Freedom

I am a dedicated saver and investor throughout my working years. I always practiced self-denial. I find it extremely difficult to spend money. I get uptight about small purchases. The difficulty is to change this mindset.

Why do people behave this way?

Let’s start with the feeling of financial well-being, that we have enough money. Some people with high financial well-being are wealthy, but many more are middle-class people who earn adequate incomes throughout their working years, save enough, and spend their savings judicially in retirement. Spendthrifts spend more than they earn. The poor struggle from low financial well-being. The frugal slip into stinginess of a scarcity mindset, depriving themselves, their families, and the needy.

I tried a mini-retirement in 2019, every withdrawal from savings was painful. I learned that I need to pursue money with joy, not in fear but not become a spendthrift.

Pension promotes financial well-being. Those lucky to have them typically do not need to save much for retirement and do not fear running out of money. Few have pensions these days. In Singapore, probably the military guys still have pensions. For most, we need to depend on CPF Life. Many bear the difficult task of spending the right amount in each retirement year. Spending needs and temptations are everywhere during working years. Fear of running out of money haunts everyone, including the wealthy in retirement years.

We tackle the tasks of savings and spending with the mental tools of framing, mental accounting, and self-control. We frame our money into distinct mental accounts. They are “capital” and “income”, and set self-control rules for saving and spending. Income includes salaries, pensions, interest, and dividends, among other sources. Capital includes houses, bonds, stocks, and other investments. Self-control tools include automatic transfers from income to capital and automatic reinvestment of interest and dividends, and the rule of spending income but don’t dip into capital.

People who are fortunate to earn good incomes during working years and employ these mental tools successfully will accumulate substantial savings. However, these useful mental tools turn into obstacles in retirement when income diminishes and it is time to dip into capital.

Self-Control is not easy to muster. Some fail to muster at all. When self-control is weak, the desire to spend it today overwhelms the desire to save for tomorrow. We have seen singers, sportsmen, and actors who enjoy substantial wealth but have wants for spending today often overwhelm wants for saving for tomorrow. Bankruptcy filings begin soon after the end of their careers.

Self Control

Some are savers by nature and nurture. The five personality traits psychologists discuss are conscientiousness neuroticism, extraversion, agreeableness, and openness. Conscientiousness is the trait most closely associated with self-control.

Excessive Self Control

Self-control can be excessive. Excessive self-control is as prevalent as insufficient self-control. Excessive self-control is evident in the tendency to spend less today than our ideal level of spending, driving tightwad to extremes beyond frugality. The prospect of spending money inflicts emotional pain on tightwad even when it might otherwise be in their interest to spend.

What if the enjoyment is in the saving, and the pain is the spending? Every so often there are articles about people who have accumulated vast wealth relative to their lifetime income, and when they pass at an old age and people find out they feel sad for them. They lived frugally and never spent it on anything. I sometimes think they are missing the point. The total enjoyment for that person was in the saving and living miserly and frugally and well below one’s means. I am that person.

Excessive self-control can induce a mindset where spending is what irresponsible people do. I am saving now because good, admirable, upstanding people sacrifice the current standard of living to save, save, save for the future.

Concern about running out of money is regularly exaggerated in inflated estimates of life expectancy. 1 in 10 of today’s 65 years old men will live till age 95. With discoveries in biotech, we may live to 100 easily. Older people spend less, in large part because physical limitations make them less able to spend and they are less inclined to spend. Spending on hearing aids, nursing homes, medical care, and funeral expenses go up.

Lots lose a spouse and they do not travel much because they are by themselves. They have enough money but just do not go anywhere or do much. They lost their best friend and have not found a second life after losing their spouse. Balance, while we have the resources to seek balance, is important to a fulfilling retirement.

Spend Now

We need not feel guilty about spending our hard-earned savings on ourselves. I have been a very conscientious saver and investor. I tried to max out CPF contribution for my wife, contribute to my mother’s CPF MA through my wife’s account for her tax reduction, and contribute to her SRS. I will have a difficult time changing my mindset from a saver to a spender. I aim to make a mental transition.

Some people derive no pleasure from spending on themselves. If I have never derived pleasure from material things, why would that change in retirement? A cup of coffee makes me happy. The psychic income from being over-saved has value. Maybe I can learn to share more money with family and the needy. It is about balancing spending on myself, my family, and the needy.

One difficult topic I have is to discuss with my parents why not give money to the next generation with a warm hand rather than with a cold one? Most of the sandwich generation aged around 40-45 years old are financially squeezed. If the previous generation has sufficient for retirement, they should pass some to the next to help relieve the financial stress at the right time. Once we pass the challenging years, the bequest may not be helpful.

Questions for Consideration

  1. Is it hard for me to spend money? Why is that? What am I worried about?
  2. Are there opportunities for me to “give with a warm hand than with a cold one?”
  3. Do I get pleasure from spending or from saving?
  4. Do I have insufficient self-control or excessive self-control?
  5. How might I change my behavior to improve my well-being?

From Meir Statman, What is the Right Balance between Saving and Spending in Retirement? The book – Wealth of Wisdom: The top 50 questions wealthy families ask.

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