What Kind of Spender Are You? Knowing May Increase the Satisfaction You Get From Your Money
Human beings love to learn things about ourselves – that’s why personality quizzes are so irresistible (and some are just plain fun, like this one that identifies your Disney villain alter ego). In this article, we describe how learning more about how you spend your money can show you things you probably didn’t know about yourself, and help you to achieve greater satisfaction in the way you use money.
Spending: necessary or lifestyle choice?
Figuring out what kind of spender you are, or more specifically, where you spend your money, can reveal things you may not have realized about yourself. More importantly, it can help you to make more conscious choices about your priorities when spending your money, which will help you to achieve greater satisfaction from your financial resources. It’s not about whether you “should” or “shouldn’t” spend money on this or that – it’s about tracking how much you spend in various categories, and then determining how much of that is necessary and how much is based on lifestyle choices.
The “necessary” category is rather limited. It includes things like your mortgage payment or rent, although there is some element of choice here, as one could choose to reduce housing costs by living in a less expensive neighborhood or a smaller home or apartment. It includes property taxes, most utilities (although blasting the A/C day and night is a lifestyle choice), and various types of insurance. It also includes putting gas in your car if that is how you get to and from work when you are not working from home. Saving for retirement is also necessary; saving for children’s college educations may also be relevant to your situation.
Note: if you do lose your job, file for unemployment. Many professionals feel they “should” get by without it, but you’ve been paying into the system for exactly this reason and you are entitled to use it. If you are self-employed, you can file for unemployment even if you are still earning some income. People who offer personal services, such as hair stylists, personal trainers, and massage therapists, whose incomes have been sharply curtailed, can still qualify.
Food and clothing are trickier to categorize – while we have to eat, having dinner delivered from restaurants four or five times a week is more of a lifestyle choice. That doesn’t mean it is a bad choice – there is no one-size-fits-all “answer” here. Consider a two-income family where both spouses have stable jobs and have children at home who need to be supervised or “motivated” to stay engaged with remote learning because their schools are closed. Food delivery services may be a great way to reduce stress and make it possible for the family to enjoy meals together. That’s a lifestyle choice that is probably worth the expense.
Clothing is necessary, but has a greater degree of choice. While COVID has led many of us to cut back on buying clothes because working from home means wearing sweatpants and t-shirts every day, or maybe a nicer shirt for video conference calls, we do expect to go back to work, or to visit friends at some point, in our “regular” attire. But if you knew that pre-COVID you had been spending $5,000 a year on clothing, would you choose to return to that level of spending? Expense-tracking allows you to make these conscious choices.
Emergency Fund – Definitely Necessary
Having an emergency fund that covers at least six months, preferably nine, of living expenses, is an absolute necessity. This is a specific amount of money held in a money market fund or something similar, that you could draw upon at any time without a loss of principal. It does not include investments in stocks, bonds, mutual funds or anything else whose value fluctuates. This is non-negotiable and non-postponable (not really a word, but it should be). Why is it so critical? Because no one’s job is 100% secure, especially in this economic climate, and if you and your family depend on your income to pay for necessities, you do not want to be forced to sell any of your investments, especially when the stock market is volatile, to cover those expenses. In addition to an emergency fund, homeowners should also establish a home equity line of credit (a HELOC, not a home equity loan) as a backup source of liquidity.
Example: a married couple’s basic expenses are $4,200/month. The husband is 65, retired and receiving Social Security (it could also be a pension – in other words, a guaranteed fixed source of income); the wife is 59 years old and still working. The wife’s income covers $2,500 of their monthly expenses, so they need to have an emergency fund of $2,500 x 9 months = $22,500. In this case, a bit more would be advisable because if the wife lost her job, or another unexpected catastrophe happened, it could take someone at her age even more than nine months to find work that replaced her income.
Expense Tracking Helps Deal with Uncertain Income and Employment
COVID has affected jobs that are not usually vulnerable in an economic downturn. A doctor whose position may have been secure through “normal” downturns may lose his or her job or incur a significant loss of income because many people are staying away from doctors’ offices and hospitals. In some specialties, doctors may not be able to find a new position quickly; for example, orthopedic and plastic surgeons could have a difficult time as so many elective procedures have been cancelled. Doctors in private practice have seen their patient load decline, often with a substantial impact on their income. Many attorneys are being forced to take a pay cut as business in corporate and other law practices slow down. An emergency fund is there to fill in the gaps when income falls short.
The Expense Tracking exercise can spotlight opportunities to save without pinching. Since dining in restaurants is not feasible in many parts of the country, many of us are spending more on groceries. However, the net amount we spend on food may be lower than what it was pre-COVID. Track what you used to spend on gas and new clothes to see how much you are saving. Spending on entertainment may be way down (except for all of those streaming services); family vacations probably cost less because we may not be flying on airplanes and foreign travel is not feasible. It adds up.
Tip: The pandemic has caused interest rates to drop to historic lows. You might be able to save hundreds of dollars per month by refinancing your mortgage.
Keep in mind expense tracking is not necessarily about cutting costs. Spending on things that give us joy is important – even necessary. Home improvement projects that make your surroundings more beautiful and “livable” can be therapeutic. If you choose to do a home improvement project, maybe putting a new deck on your house or adding a bathroom, that may increase the value of this asset. Still, it’s more important to have funds available for living expenses than putting too much into an illiquid asset, such as property. Online shopping has become a game-changing convenience, but be mindful when you click Add to Cart – some people (out of boredom) have turned to “recreational shopping” and may not realize how much they are spending. Expense tracking will show you how much you are saving as a result of COVID-induced changes, and where you are spending more. Then you can make a conscious, intentional choice about how to save or use your money in ways that enrich your life.
Taking Advantage of Today to Plan for a Better Tomorrow
Expense tracking can be a great way to evaluate what your actual cost of living will be in retirement. Of course, your current spending under our COVID-imposed lifestyle understates what your actual travel and entertainment costs are likely to be, but it’s a good time to consider saving more now so that you can enjoy more of those things later, especially if you are close to retirement.
If you are already retired, have more than you need in your emergency fund and are drawing on your investments to generate income, you might consider reducing the amount you draw (note that there are no required minimum distributions from retirement savings accounts this year). If you are still working and your income has dropped this year, it could be a good time to do a Roth conversion – talk it over with your financial advisor.
If you’ve examined your spending, you have that nine-month emergency fund and your HELOC is in place, and you realize there is room to save more, what about investing? Some people are asking, “With so much uncertainty, should we be adding to our investments now?” Absolutely. This proverb of long-term investing is always worth repeating: it’s not about timing the market, it’s about time in the market. Continuing to invest on a monthly basis will help you prepare for a comfortable, enjoyable retirement.
Expense tracking can be eye-opening. Knowing how much you spend shows the choices you’re making with your money – it’s a factual representation of your true priorities. This is particularly interesting now, because COVID-19 has forced us to modify our spending habits, creating a unique environment to examine how we used money when our choices were unrestricted. If, in the pre-COVID world, you spent a good amount on concert tickets, sporting events or high-end restaurants, that’s not “bad” but it’s good to know how much you typically spent on them over a year. Now that we are forced to pause certain spending, it's a perfect time to evaluate how we spend. It can be like putting on a pair of glasses that allows you to see things you probably hadn’t noticed before. If you need any help with your evaluation, don’t hesitate to reach out to your Gold Medal Waters advisor.