By Professor Ricardo Ulivi, Ph.D.
In my decades helping people with their personal finances, two truths stand out: spenders cannot save and savers find it very difficult to spend.
I have never had success in transforming spenders to savers, so I prefer not to deal with them anymore. Too frustrating. Once, however, I thought I had triumphed. I had a spender who swore to reform, and he seemed so committed that I decided to help. We prepared a detailed spending budget and I had him meet with me every other week. Remarkably, after two months he had saved a few thousand dollars that he used to pay off most of his IRS debts and penalties. I was very proud of finally having made an impact on one spender, but my happiness was not long lasting. On the third month, he blew an entire month’s income on a first row seat to a concert by Barbra Streisand.
I decided never again to work with spenders.
I specialize in retirement planning, and right before retirement, my typical client’s net worth is higher than ever before. My typical client is a saver. What amazes me about this group is that I often find myself prodding them to spend. That word to them is like kryptonite was to Superman, or the cross to Dracula!
Why is it so difficult for savers to spend?
I suspect there are many reasons, but I believe I have identified a few through personal observation. One, it’s in their DNA. I am convinced that savers are born that way. Just like a squirrel knows that it needs to save, and a bear knows that it needs to eat before winter—and don’t ask them why, they just do it—that’s how savers are. They save all the time; they did as children and they do as aging retirees.
The second reason I believe savers save is impulse control. While a spender might walk by a store and see a beautiful bag, and buy it, the saver sees the same beautiful bag, feels he/she might love having it, but at the same time, an auto pilot comes on. The impulse control tells them “not now.” As he saver walks away, the rationalization process starts. What brings me more joy–to have that bag or the $1,000 in my checking account? How much would the bag be worth in 5 years (zero), but if I invested that money at 5%, what would it be worth in so many years? The rationalization kills the desire to spend.
The third reason that savers do not spend is habit. Most likely they have had a lifelong habit of saving, and it’s just nearly impossible to break. Given that habits get solidified with years, if you are a saver, you can expect that trait of yours to get worse as you age!
Fear is another factor that makes savers save. I know. I suffer from it. My greatest fear? To become financially dependent. The thought of having to ask my children for money so I can pay rent, food and medical expenses motivates more than anything to save. Just the thought of it triggers a cold chill down my spine.
How do I get savers to spend?
This is one tough job, but I have devised a methodology. I suggest they to open a guilt-free spending account and put money there earmarked to be spent only in the next 12 months. Here’s how this works. Let’s assume this saver is planning to retire. He or she has a few million dollars saved and can easily afford to spend $150,000 per year to meet living expenses. But now comes the key question, the one that triggers lots of anxiety: can this person afford to spend, let’s say, an extra $30,000 a year on travel? The financial answer is YES, they can easily afford it. They are instantly happy at the thought that they can afford to begin travelling around the world.
But within minutes of leaving my office, their impulse control kicks in and they start rationalizing. “If we spend $30,000 a year in travel, times 25 years that we expect to lives,that’s $750,000, which invested at 5% will grow to about $1,500,000 over that same time period. No way am I going to spend that much on travel.”
So what’s my formula for getting savers to spend? I use the old one day at a time approach.
Open a Guilt-Free Spending Account
In the case of the example we just reviewed, I would tell the client not to think of spending $30,000 EVERY year but to do it only once, and then see how it feels. This reduces anxiety, rationalization and impulse control. I tell them, “Let’s take $30,000 and put it in a separate account and call it your guilt-free spending. Then go do it—but just for this once!” Next year, we will re-evaluate.
Am I successful with my approach? Not always. Remember, savers have a lifelong habit of saving. It’s very difficult to break a habit, but with patience, I sometimes succeed!
If you are a saver and would like help in getting you to spend a little, call me. I can help. And if you need some retirement planning advice, I can help with that, too!