One of the most important things we help clients with is developing a spending plan so they can enjoy life without tossing and turning at night, worrying about whether they’ll have enough to pay the bills or run out of money too early.
Some people, though, find it very hard to spend. We can reassure them that they have ample resources, and run all kinds of projections showing that their money will last as long as they need it to, but they still find it difficult to commit to the indulgences of life, ranging from the small (lunch out with a friend), to the medium (taking their granddaughter to meet the princesses at Disney), to the large (tickets for that long-awaited trip to Alaska).
Sometimes it’s generational, as it is with clients with personal or family memories of the Depression. Other times it’s clients who are so successful at saving and deferring enjoyment, that we worry they might just defer it too long. How many people put off that special trip only to find that their health now makes that trip impossible?
While it’s important to save (our clients certainly know we harp constantly about saving 10% to 15% of income per year while working), it’s also important to know how to spend wisely.
So a tip of the hat to Dan Ariely, Duke University professor of behavioral economics and Wall Street Journal columnist, for what we think is a great idea to encourage the super-thrifty to loosen up and spend a little.
In response to a reader’s question about getting well-off but frugal parents to spend more, Ariely suggests pinning down how much “extra” money is left in the budget at the end of each month. Call that the “fun money,” he says.
Then, Ariely suggests handing the parents two prepaid debit cards, which are preloaded with the “fun money,” transferred over from their checking account each month.
“In this way,” says Ariely, “the fun money will be set aside from the beginning, with a different physical identity and declared purpose—a little like chips in a casino.”
We know from other research that clients find it easier to spend when the money is already earmarked or set aside for a specific purpose (they tend to see it as already “spent” and no longer agonize over the spending decision). That’s partly why people have more fun on prepaid cruises and other trips.
So if you’re a person who finds it hard to spend or “treat yourself” financially, here’s a suggestion:
Include a line item in your budget for “Travel,” “Visiting Grandkids,” or whatever your special indulgence is. Once you’ve added that item to your budget, you need to commit to actually spending it, each and every year. Twice a year, sit down to make concrete plans, book the tickets or make your special activity a reality.
The Takeaway: It’s not about the money. It’s what you do with it.