WHETHER WE EARN or not, as long as we live, we spend money. It costs to live. It is therefore important that we spend wisely. Spending wisely describes using the funds held or earned in such a way as to sustain or to build wealth.
Spending wisely does not mean pinching every penny before it is spent, or living as a stay-at-home miser. It rather emphasises avoiding putting extraordinary pressure on your ability to earn, avoiding accumulating more and more debt, avoiding the necessity to work well past your normal retirement age and ultimately achieving your unique financial goals.
It is found that people spend carelessly at all levels of income, all levels of education and social status and virtually across all demographic factors.
There is just a human propensity to spend beyond one’s means which, in turn, accumulates debt. There is also a natural aversion to saving and investing adequately for the future. In the short term, spending on what we like and enjoy makes us happy.
However, there is a longer term perspective. The detailed examination of the time value of money over the last couple of weeks underpins the resolve to be better spenders for 2016. With a better knowledge about earning and paying interest, and about compounding and discounting funds over time, it is hoped that you can and will now better match your living with your spending.
Life has definitive stages. The most important stages with regards to your spending are the stages when you earn and those when you do not. The most important non-earning and generic life stage of non-earning is retirement, although some people never retire completely and others do not live to see that life stage.
By considering the future value of your savings over time as against the ability to adequately fund a retirement annuity over a 15 year period, the time value is emphasised as a potent element of balancing your finances. The time value of money also underscores another important aspect of wise spending – delayed gratification, or some may simply say sustainable gratification.
What’s the point of expending on an expensive round-the-world vacation which eventually leads to poverty during the retirement stage. You may enjoy your trip yet be miserable and financially stressed during retirement. Alternately, what is the point of being a workaholic and accumulated excess savings and investments and never getting around to doing the things you enjoy, or to spending treasured and enjoyable times with family and friends? Even where there is wealth or wealth building, there needs to be wise spending.
Explicitly setting out your values and financial goals helps to define wise spending and points you in the direction of that balance and of sustainable personal gratification. It is not just about saving and investing more money from as early as possible. There are different approaches that work in different situations because people’s life circumstances differ.
The truth is that it is fun to spend. It feels good acquiring shiny new things, and you likely also feel happy that you will be the envy of the Jones who cannot afford your lifestyle. This immediate psychological thrill and boost to your self-esteem may not, however, be in your long term interest. Although to live is to spend, there is merit in avoiding short-term thrills if you wish to have a fulfilling life at all stages.
Building on a more thorough knowledge and understanding of the time value of money, the psychological drivers of our behaviour and the need for delayed or sustainable gratification, and armed with a drive to achieve our financial goals, we are now all better to consider wiser spending in the year ahead.
The next article will present five (5) underlying principles of spending wisely.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.
