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Spending Later

MarshmallowsSpending Later

Let’s face it; the word ‘save’ falls in the same category as diet and exercise. It’s one of those things that most people would like to do, but not now. One day. And even then, it’s something you might attempt but give up on. The word ‘spend’ sounds so much better! Somehow the word ‘save’ seems to imply going without, living frugally, not enjoying life to the full, buying cheap, low quality things, hunting for hours to find the lowest price for something you want, and so on. Because it has all those negative associations, it’s not something we want to do.

One of the ways to trick your brain into giving ‘saving’ a positive meaning is to reframe it. So instead of using the term ‘saving’, talk about ‘spending later’, which is exactly what saving is. There is a perception that money saved is untouchable;  that somehow it disappears into a dark vault never to be seen again, causing the saver to be deprived. Saving means going without now. Spending later means enjoying more than you have now, but later. There is a famous Stanford University experiment, commonly called the marshmallow experiment, where small children were left in a room with a tray of edible goodies. They were told to select one treat, and that if they ate it immediately they would get no more, but if they waited a few minutes they could have another one too. These children were followed through adulthood and it was found that those children who had resisted temptation achieved more success in life than the ones who didn’t. Saving is just delayed gratification. Of course, gratification can’t be delayed forever. The key challenge is to get the right balance between spending now, spending a little bit later, or spending a lot later.

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Choose to Save

Choose to SaveChoose to Save

Getting the right balance between enjoying life now and saving is easy once you understand that saving still allows you to enjoy life, but later. Saving is just deferred spending, and it needs to be broken into time-based spending categories which reflect your goals, that is, the things in life that are really important to you. For most people, there are four categories of saving: saving for unexpected essential expenses or loss of income (your emergency fund), saving for the things you want to do in the next five years or so to enjoy life (such as travel or home renovations), saving which is applied to getting rid of debt, and saving for longer term goals such as retirement. How you allocate your money between each of these categories depends on your goals and personal preferences. There is no right and wrong answer, no magic formula, no-one looking over your shoulder who has the authority to criticize or applaud the choices you make, and no-one other than you who can decide the best approach. There are just two important conditions to be met. Firstly, saving is something that needs to be done as a deliberate, considered act, and secondly, you need to understand the consequences of the spending and saving choices you make. Your first priority for saving should be for your emergency fund, which is your buffer for when things go wrong.

Taking a passive approach to saving simply does not work. The idea that somehow money will be left over when all the spending is done is pure fantasy. A determined choice to save needs to be made, with the understanding that the less you save, the less enjoyable your life may be in the future, unless you can find more ways to enjoy life without spending money

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The Trouble with Saving Too Much

LotsOfMoneyThe Trouble with Saving Too Much

Money means different things to different people. However, one thing is clear – money is not an end in itself, but something that enables us to enjoy life. This is where the differences arise, because everybody has a different view on the way in which money brings about enjoyment. For some people, money brings instant gratification in the form of the latest fashion or the latest technological gadgets. For others, money brings a comfortable home to live in, education, interesting experiences through travel, or the ability to reduce working hours to spend time with family, to help the community, or to undertake creative pursuits such as writing or art. For one group of people, the most important aspect of money is that it offers security. These people are usually known for their frugality and their aversion to taking risks with money. While it may appear that such people see money as an end in itself, it is simply that the feeling of security ensuing from having money allows them to enjoy life more, despite the fact that they spend less than others.

Frugality can, however, be taken to the extreme. The trouble with saving too much is that it can destroy relationships with family members and friends for whom money represents more than just security. There is a point too, at which security is achieved and saving beyond that point is simply obsessive. The challenge for a security-conscious saver with deeply engrained attitudes towards saving is to know when and how to stop saving and start spending. Otherwise, opportunities for enjoyment may be lost or left too late in life when old age and poor health preclude an active lifestyle. The right balance between spending and saving is different for everybody but neither should be taken to the extreme.


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All About Savings

Success in TeamworkAll About Savings

There is really not much difference between spending and saving. All money is spent – it is just a question of when. When you receive money, you can choose to spend it now, a little bit later, or a lot later. Ultimately, money you don’t spend during your lifetime will simply be passed on to someone else to spend. Saving is therefore just deferred spending.

What you do with money you wish to spend later depends on the time frame in which you estimate you will spend it. Savings therefore need to be split into three categories:

An Emergency Fund

This is money you might need to spend now. It covers unexpected expenses such as car repairs, dentist and medical expenses, or home maintenance, and unexpected loss of income from sickness or redundancy. Use a high interest at-call savings account for accessibility and save a regular amount into it to keep it topped up.

Medium Term Savings

Money you plan to spend a little bit later, say within the next three to five years, could be accumulated in your emergency fund and transferred to a term deposit or similar investment that pays a reasonable rate of interest and does not change in value. The amount to save should be whatever you need to achieve your goals, which might include travel or home improvements.

Long Term Savings

Finally, there is money you plan to spend a lot later, for example in retirement. Over a long time frame, your savings will need to earn a higher rate of return to keep ahead of inflation and tax and you could therefore consider saving into a diversified investment product that has some exposure to property and shares which grow in value. Until your mortgage is paid off, use only KiwiSaver for long term savings.

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