‘Tis the week before Christmas, and all through the town there is a general hustle and bustle as people sprint to finish their holiday shopping spree. You can see the tinsel and the lights strung up and down the boulevards as carolers begin to gather around the park. Its a time where you are close to friends and family passing around holiday favorites such as fig pudding and Christmas turkeys. Yet all is not well for in the coming weeks will come the dreaded New Years and with it the dreaded ghosts of New Years resolutions. All those delicious Christmas Pies come back to haunt you as the ghost of New Years gym membership. The tinsel and lights you string up conjures up the ghost of home improvements. Last but not least, all that holiday spending summons up the greatest Grinch of all, your unhappy annual savings resolutions.
Unfortunately, come the new year, it is time to pack up the holiday cheer and get back to the “reality” of budgeting and saving for retirement and rainy days. Of course, as with all things, most of these New Years resolutions will come back to haunt you in the years to come and a seemingly never-ending cycle of guilt and resolution-making creates very few results and it is difficult to measure any progress. Perhaps it is time to break this cycle and start to frame things in a way that help people enjoy the holiday spirit instead of creating a ticking stress filled time-bomb.
Let’s agree to break free from the idea that people live solely to maximize their net-worth. As financial planners, we become so used to leveraging products and budgets that help people to maximize their net worth at any given point in history. This is a great technique when you understand a client’s goals well and allows you to maximize their economic efficiency. However, thanks to some of the groundbreaking work by Richard Thaler in the area of behavioral economics, we can now fully grasp that individuals are more complex and operate without always maximizing their personal wealth. How revolutionary for our industry to finally come to the conclusion that people don’t see themselves as walking spreadsheets.
So rather than focus on the humbug of spending, we need to understand the underlying importance of the spending. Savings and spending are a seesaw. The more you save, the less you spend and the more you spend the less you save. The idea is to keep this balanced so that spending can be continued into the future. At the same time, going overboard with the saving will create a painful lifestyle. The implementation of lifestyle changes should take into account the happiness attained per current dollar. This contrasts with always using strategies to maximize future dollars. To highlight this point, imagine explaining to a billionaire that the best way to maximize their future wealth was to no longer eat at fine restaurants but simply to cook at home and drive an affordable used vehicle. The suggestion is indeed correct in that it will increase the dollars available in the future for the billionaire. However, this advice sounds rather odd when you hear of a billionaire having to restrain spending. This is because the happiness that a billionaire gets from the money they spend far exceeds the value of the money in the future that they spend considering that they no longer need to worry about outspending their future or current needs. So this means that each person (from graduate students to CEOs) has a unique curve to their happiness and their definitions of necessities and emotionally important items. So lets explore the chart below a little more.
To attain happiness as an individual, it would be very difficult to go without the necessities such as food/water/shelter. That is not to say that variations on this would not be possible, for example, shopping at Whole Foods is quite a different experience than shopping at a Fry’s or Safeway. As you move up the rung of dollars spent to obtain things that make a person happy, we move into things that are emotionally important to someone. For example, a subscription to a cable network may just be a waste of monthly dollars that can go into maximizing a retirement plan. However, for someone else this may be the thing they do to connect with their friends over the weekend by hosting them over to watch a game. They then rely on that group for emotional and social support and leaving that expense at the door would have a vast effect on their happiness even more than when they are older and may only be able to afford Safeway as opposed to Wholefoods groceries.
So rather than maximizing future dollars, we as planners, need to treat every dollar saved almost as a “robbery” of happiness. We can certainly justify this as a good form of robbery as the future self will appreciate the lifestyle preservation. However, this will always come at the expense of the current self. It is with this in mind that we must check our own Grinch-like/ Scrooge-like natures and instead realize that spending is not in it of itself the plague of a good financial plan but rather the reason it exists in the first place.
By consistently monitoring every dollar that goes into fulfilling financial goals, we understand there is a bit of happiness that goes away. The hope is that we spare the things that create the most amount of happiness now to preserve that similar level of happiness for the future. In so doing, just as Santa Clause comes around once a year to give good boys and girls presents on Christmas, your financial planner can use financial wellness to help you continue to treat yourself to well earned presents as you move towards your financial goals.