Save like a vault, spend like a Rock Star
By Clayton Daniel
I
love it when a simple mathematical illustration can explain things clearly.
Think the Pareto Principle of 80/20. Pretty much a well-established fact you
will get 80% results from 20% of the effort. Simple, easy to understand, and
pretty accurate.
“People
are split almost down the middle 50/50 between savers and spenders”
The
same goes with standard deviations. We all know the bell curve, but the fact it
almost perfectly summarises the population in terms of whether they are a
Spender or a Saver is almost uncanny.
Based
around research from a range of sources and my own experience as a former tax
accountant and financial adviser, I’ve come to the conclusion people are split
almost down the middle 50/50 between savers and spenders. Half the population
spend everything they earn, and the other half manage to put some money aside.
It gets a little more interesting when you break those two halves up even
further between moderate and extreme.
Run-of-the-mill
Spenders
By
that I mean, the first deviation of Spenders are your everyday, run-of-the-mill
Spenders. They are the type of person that runs out of money just before pay
day, and are relieved when the next pay cheque comes in. They don’t really get
themselves into too much trouble, but aren’t really interested in doing
anything to ‘get ahead’ other than focusing on the next pay rise or promotion.
Pay-check
to Pay-check Spenders
The
second deviation Spenders get a little more serious as these people start to
get themselves into a little bit of trouble. The first filter they gauge each
decision with is ‘what do they want’? The basic premise is if they can’t afford
something now, they will with next month’s paycheque. These type of people
carry around the $10-$20k debt in credit cards and personal loans and don’t
really think it’s a problem. The idea of putting money aside for the future is
redundant as they have ‘bills to pay now’.
Train
Wreck Spenders
The
third deviation on the Spenders are train wrecks. The problem is, by looking
from the outside in, you can never tell. These people make up the 2.5% of the
population that look amazing on the outside, but peer beneath that surface and
things are going to hell in a handbasket. These type of people are in
astronomical amounts of credit card and personal loan debt and really only have
two ways out, lots of hard decisions or bankruptcy. The problem is generally
too big to admit to themselves, and instead they focus on a mythical ‘big pay
day’ to solve all their problems.
The
Savers on the other side of the divide may sound like they have everything
together, but they too experience their own set of problems.
Save
to Spend Savers
Let’s
first examine the first deviation, the regular Savers. Interestingly, these
type of Savers only save to spend. That’s right, the majority of Savers are
really just delayed Spenders. These Savers will save for a specific purpose, be
it a holiday, a new vehicle, or a home. The purpose of their savings is to
facilitate the purchasing of things they want to spend money on without going
in to too much debt.
Savers
with Intent
The
second deviation Savers have a little more intent in their savings. It’s only
at this point do we finally meet people who are interested in putting money
aside for later in life. They will put aside the classic 20% of their salary to
build long term wealth, have no personal debt, but struggle to find the balance
between reaching lifestyle goals and not spending too much money. I understand
this issue, because if you are disciplined enough to stick to putting money
aside, it’s hard to turn that switch off.
Dollar
Saved is a Dollar Earned Savers
And
finally the third deviation or most extreme Savers are the one’s solely focused
on building wealth from a young age and put every single cent aside to achieve
that goal. They want to save every single cent, any money spent is money lost.
To them ‘a dollar saved is a dollar earned’. They are the kind of people who
never do anything social, and on the off chance you get them to join you, don’t
get stuck on a round of drinks with them as we both know you’ll end up carrying
them.
“The
mentality of each side means that once the grooves of consistent behaviour have
set in, it is extremely hard to change”
So
you have your Spenders on one side and your Savers on the other, and never the
both shall meet. The mentality of each side means that once the grooves of
consistent behaviour have set in, it is extremely hard to change. Not to say it
can’t be done, but it’s hard. And if there is ever any conversation around
change, it is always to move someone from being a Spender to a Saver.
“It’s
as if the answer to all of life’s issues can be solved as one moves from being
a Spender to a Saver….and here in lies the problem”
The
problem the Spenders will attest to here, is it’s much more boring on the
Savers side. And let’s face it. They have a point. It is. But I think this idea
epitomises the major flaw in our corrosively boring ‘personal finance’
education. It’s as if the answer to all of life’s issues can be solved as one
moves from being a Spender to a Saver.
“The
answer is not to go from spending to saving, it is to exist simultaneously
everywhere on the divide. To save like a vault and spend like a Rock Star”
And
here in lies the problem. What self-respecting Spender is going to hang up the
gloves and become a penny pincher? It’s not going to happen. In fact it rarely
does happen. So do we just leave it there? An endless array of personal finance
specialists, one after the other repeating this advice to no avail? Is this the
only answer? Or once again, have we all just taken this advice from people with
no real world experience?
“
The answer is not to feel bad about spending your own money, but instead to
have an amount set aside for guilt free spending”
After
managing the cash flow of people on all ends of this divide, I can tell you the
answer is not to go from spending to saving, it is to exist simultaneously
everywhere on the divide. To save like a vault and spend like a Rock Star.
The answer is not to feel bad about spending your own money, but instead to
have an amount set aside for guilt free spending. The goal is not to have ‘long
term savings’ as the word ‘savings’ is super boring and un-engaging, but
instead to have ‘investments’. And the goal is not to avoid travelling, but to
have a ‘lifestyle bucket’ to support your need and want to live the life you’ve
worked hard for.
“Automation.
Automation is key”
But
here is the hard part. How do you hold two opposing thought patterns – both
Spender and Saver – at the same time? If you were lucky enough to read my last article for Raiz you will know the
answer. Automation. Automation is key. Remove your fallible self and the
inefficient use of your own time and decision capacity and outsource to
automation.
Stop
wasting your time managing your own money and let technology do this for you.
Clayton Daniel, Financial commentator and
author of upcoming book Fund Your Ideal Lifestyle
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