Are you a recovering spender? Or have you always been a frugal saver? Saving is always a good thing, right? Is it possible to oversave and could your saving actually be hurting rather then helping? Sure! Anything done in excess can be a problem. Here are some ways to save with purpose and not feel guilty about spending some of your hard earned money.
The Problem with always saving and never spending.
Many people have periods in their lives where they have to be careful with every purchase they make. They learn to count every penny and make the most of everything they spend. Hopefully as a result, their income grows, their spending stays the same, and they're able to save a sizable amount of cash and investments. This is great! But life is NOT just about how much you accumulate, it’s about enjoying yourself too. As a financial advisor I need to be reminded of this sometimes. Financial planning is really all about balancing your goals today with your goals tomorrow.
Save With a Purpose
Stockpiling money in your bank accounts can turn you into a miser in no time. You’ll end up spending your days counting your money and not doing anything with your life. Dinner and drinks out with friends, buying new technology that makes your life easier, traveling/seeing the world around you, and anything that you enjoy could all be legitimate forms of spending. You just need to make sure you can afford these things after taking care of the essentials like your rent/mortgage, retirement, education, etc. I suggest prioritizing your saving and spending.
Decide what you need and what you want to save for. Then decide how much you need to save to accomplish each of these goals. Once you have that money set aside, it's time to spend it on what you've saved for. If it’s for a longer term goal like purchasing a house or retirement, then you have to let it simmer and grow through investing. Don’t be tempted to skip the saving part and pay your goal with a credit card – that’s just taking spending in the future and using it today and is an expensive way to accomplish your goals.
When you have goals for your money, it will help you be more purposeful with your earning and spending.
Set Aside Enough For Emergencies
Before you spend money on anything, you need to have enough set aside for emergencies. I suggest having enough to cover 4-6 months of living expenses in case something happens. If you have a volatile job where your earnings fluctuate (like a Realtor) you should have even more than that. If you have access to quick cash through a home equity line or a Roth IRA you could have less but there is no substitute for cold hard cash, especially in an emergency.
Create a Budget With Spending Line Items
Creating a yearly budget is a great way to plan to spend your hard earned money. A comprehensive budget includes all income, expected expenses, incidentals and savings/investments. Once you have everything accounted for the leftovers will be your fun money. Or you can even put “splurges” into your budget. This will give you the mental freedom to spend your money without regret. You can confidently know that all of your bills are covered, along with your saving goals.
Invest Your Money to Increase Earnings
If you have a fair amount of money stashed away in bank accounts that’s a good start. The money may be providing you peace of mind but it’s not doing much more than that. You need to put that money to work for you and start investing. The investment can be stocks, real estate, or some other money making endeavor. When I am evaluating investments I always consider that the stock market returns approximately 10% on average per year over long periods of time. Therefore, I’m not going to buy a real estate investments if it’s only going to provide me with a 15% return because I know it’s going to take a lot more time to manage and has a lot more risk associated with it.
Even with investing it’s still a good idea to have a purpose. We call this investing with purpose. Maybe you are investing for retirement, college, or a house. Knowing this will help you determine how to invest.
Spending Now Helps You to Be a Better Saver
When you feel guilty about spending your own money, you tend to fall into a trap where you make larger splurge purchases. If you get in a habit of spending without going over your income by planning ahead, you won’t make big splurges or at least they won’t be so severe. Even dieters have a “cheat day” where they plan to take a break from their strict healthy diet and eat their favorite fast food or desserts.
The saving mindset is good, but can affect overall happiness as well. Life is meant to be enjoyed. You should have a good balance between saving and spending or you will burn out one way or another.
Save with a purpose, spend what you can afford, invest your savings, and enjoy your money. That is the key to handling your finances wisely and living a happy life.