We all have our money personalities. For example, from the time my sister and I were first able to babysit, she would take her pay and go shopping, and I would put mine in the bank. It's not that I was making some great sacrifice. It's just that I couldn't think of anything I wanted more than the sense of security that came with knowing I had cash saved for dealing with any possible situation. As I got older, my idea of luxury was having the wherewithal to make work optional. My Practical Investing portfolio is the result of that thrift.
Savers and spenders face different financial-planning challenges. Spenders have to rein in the urge to splurge in order to save for future goals. We savers, by contrast, have to be persuaded that it’s okay to spend at some point. One planner laughingly told me that he had to nag a retired client who was worth millions to buy a new car and take vacations because the man didn’t want to spend more than he collected from his pension and Social Security. “Can you believe it?” the planner asked. Actually, I could.
Spending more than I earn pushes me out of my comfort zone. Yet possessing money means not only figuring out how to invest it but also considering how to use it to improve our lives and those of the people around us.
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What about leaving your children an inheritance? I want to help my kids long before I die. I think it would be a horribly wasted opportunity if I didn’t help them buy a house or take wonderful vacations (with me, I hope) when they’re young and struggling, only to leave them a wad of cash when they’re older and well established.
But how do you get a saver to spend? For me, it’s a two-step process. First, I make sure that I have enough to handle every contingency I can imagine, from the short-term demands of paying for a wedding or a new car to the possibility of a serious illness. And because those contingencies include retirement, I usually start by using a Web-based retirement calculator.
This calculator will tell you how much you need to save each month to meet your retirement goal. Is it less than you’re currently saving? If so, the difference between what you’re saving and what you need to save is the amount you can safely spend each month from now until retirement without jeopardizing your future.
Of course, the further you are from retirement, the more speculative the calculation, so be conservative. And, naturally, do annual check-ups to make sure you’re not going overboard on your spending. But let’s say you could spend $1,000 or $20,000 a year more than you are now. What could you do with that money?
Spread the Wealth
Everyone will answer that question differently. A few years ago, my parents took our whole family—11 of us, in all—to Europe for their 50th anniversary. It’s a trip we’ll never forget. A friend’s mom started sending her grandchildren, who are in college and living on tight budgets, a few hundred dollars now and then. She was rewarded with long, cheerful phone calls, during which the grandkids gushed about what they did with the unexpected cash.
Those who have bigger stockpiles might decide to help their kids, grandkids, nieces or nephews buy homes, or help them pay college bills or student loans. Or perhaps you’ll want to increase your contributions to charity. How you use your extra money will likely be a function of how much you’ve got and the rich and complex dynamics of your life.
The important thing to remember is that money is a tool. Don’t forget to use it.
Kathy Kristof is the author of the book Investing 101.