[Update December 2019: It was fun to go back and read this “classic post” from 2012. My assistant editor suggested I put a note on it to update it a bit before republication. You'll find that note at the end of the post.]
I'm writing this post as much for my benefit as for yours. Although the opposite malady is far more common in our society, there are some of us that are compulsive savers. Like most things in life, there is a spectrum ranging from the spendthrift to the hoarder, and we're all on it somewhere. By virtue of the fact that you actually spend time on a blog like this one, you're probably closer to the hoarder side of the equation. Don't feel too badly, so is the editor of this fine site. But the diagnosis must precede successful treatment.
The Compulsive Saver
A post on the Bogleheads forum (a well-known internet destination for the thrifty/frugal/compulsive saver) linked to a chapter in a book called Money Madness which says this about the compulsive saver:
The compulsive saver carries the idea of thrift to an illogical extreme…saving becomes an end in itself…savings is not done for some future reward; saving is its own reward…
The compulsive saver must put a certain percentage of every paycheck in the bank before paying bills or taking care of other financial obligations…paying full price for anything is a painful experience…satisfaction from spending money does not derive satisfaction from pleasure in the item purchased but from the fact that it was purchased at substantial savings. The obsessive preoccupation with money overshadows everything else so that the only aspect of any object or event that registers in the mind of the compulsive saver is the cost. A show or ball game is not seen as an evening's recreation but as the expenditure of a ten dollar bill. A vacation cannot be enjoyed as an opportunity for a change of pace and a chance to unwind and relax. Instead it is an experience of mixed emotions, with the pleasure ultimately measured by the amount of money painfully extracted from the purse or wallet.
I'm sure a few of us can relate. Here are two recent examples from my life that have made me wonder if I'm slipping too far toward the compulsive saver side of the spectrum.
Savings Limits Increased
I hate paying taxes. I do my best to pay as little as legally possible. The best way for me to lower my tax bill is to max out my retirement and similar savings accounts. Not only do these contributions lower my tax bill, but unlike other ways to lower it, like paying mortgage interest or donating money to charity, I get both the tax break and I get to keep the money.
So I've tried to do that ever since I've been a resident, and for the most part, have been extraordinarily successful at it. But “the bill” seems to go up every year. When I was in the military all I had to do was put $17K into the 401K and $5K into each of our Roths. $27K and I was done. I could spend the rest “guilt-free.” I put a little toward the kids' college, saved a bit more in a taxable account (especially in late 2008 when stocks were on sale), and paid down the mortgage a bit, but for the most part, just spent or gave away the rest my income.
Since I've gotten out, my opportunities for tax-advantaged saving have gone through the roof in 2012. I can put up to $50K into our 401K/profit-sharing plan. I can still do $10K a year into Roth IRAs, via the backdoor route. This year I became eligible to use our defined benefit/cash balance plan, another $15k. I just switched to a high deductible health insurance plan, so now I can do an HSA (stealth IRA) for another $6250. I'm now in a state where I get a tax deduction for 529 contributions, up to $10K a year. The grand total I need to save now in order to minimize my taxes is a whopping $92,250. Despite my increased income in private practice, that total still represents far more than the savings rate I recommend to readers of this site (20%.)
You can imagine my dismay to recently learn that due to inflation the IRS is going to allow me to save EVEN MORE next year. A regular 401K contribution is going up from $17K to $17.5K, IRAs are going up to $5.5K each, and a profit-sharing plan limit is going up from $50K to $51K. Even the 529s are going to allow me a slightly bigger deduction next year. And I'm not even 50. If I were I'd be able to put another $1000 into each IRA and another $5500 into the profit-sharing plan. This increase feels an awful lot like an expense or a tax bill to me right now. [These numbers are from 2012 when this post originally published. – ed]
Now I've run the numbers and I don't need to save $100K a year toward retirement in order to meet my retirement goals. But I find myself inching out on the spectrum toward the compulsive saver in order to take advantage of these opportunities. In fact, there are two other good investing opportunities only available to me in a taxable account right now: buying shares in my hospital and shares of the real estate our partnership uses for our business office. But I hate to give up a guaranteed tax break to use these opportunities, and I really don't want to limit my spending any more.
My Recent Shopping Trip
I enjoy spending time outside enjoying hobbies. In the last year, I've spent significant amounts of time downhill skiing, backcountry skiing, rock climbing, mountaineering, hiking, canyoneering, mountain biking, road biking, boating, water skiing, wakeboarding, camping, disc golfing, playing ice hockey and running. Unfortunately, I have so many hobbies I've never been able to afford the best gear for all of them, especially now that my kids are getting into many of them. The more I spend on a bike the less I can spend on skis. If I fix up the boat, I can't buy a new rope. So I love opportunities to get quality gear on the cheap.
We woke up early this weekend to go to a ski swap well-known for great deals on nice gear. After a couple of hours I'd picked up two pairs of skis, bindings, and poles, a couple of jackets, some boots, an avalanche probe, and a backpack, all used and severely discounted. In fact, my wife was mad when I bought the same pack for $25 that she had just purchased for me as a $200 Christmas present. It was nice to finally get some of the stuff I've been wanting to buy for a while, but I have to admit that part of the pleasure of the experience was scoring “the deal.” And I've definitely experienced a painful sensation in the past when spending money unnecessarily while eating out or on vacation. So I think I've definitely got a tendency toward a compulsive savings habit. I suspect at least a few of you do too.
Treating The Compulsion
So here are some tips if you find yourself forgetting “moderation in all things.”
1) Grow Income
If you're like me, and want to max everything out, you can still do that AND have more money to spend if you make more. You can increase your income by working more hours, by increasing your income per hour worked by making your practice more efficient, or by developing a side income. It's always easier to save $50K when you make $250K than when you make $200K.
2) Stop saving once you hit your goal
Run the numbers and figure out how much you really need to save each year. Then when you hit it, stop saving. If you're not sure how much you need, I suggest putting 20% of your income toward retirement.
3) Remember that all stages of life are different
There are times in your life when saving should be a priority — such as your late 30s and your 40s. A dollar saved in your 30s is 8 times as valuable as a dollar saved in your 60s. Other stages, like med school and residency, and in retirement, are the time to spend. Remembering your priority for your given stage will help you make the transition to spending your money.
4) Learn to enjoy spending as well as saving
Spending money is fun. Saving money can also be fun. Learn to enjoy both. You save now to spend later, not to accumulate some huge stash of cash to die with.
5) Use a credit card
If you're unable to save enough money, I've recommended you get rid of your credit cards. Credit cards have been shown to cause you to spend more money than if you spend cash, because it is more psychologically painful to part with the green stuff. The reverse is also true. If it's painful for you to spend money, use a credit card. A compulsive saver is unlikely to get into credit card trouble, so you might as well take advantage of the convenience.
6) Let your significant other buy stuff for you
Many couples are composed of a saver and a spender. If it's painful for you to spend, have your S.O. go do it for you. Then you get to enjoy some nice stuff without having to feel the psychological pain of buying it.
Most highly paid professionals aren't saving enough money. But if you're at the other end of that spectrum, hopefully, some of these tips will help you find a balance between your spending and saving.
[Editor's Note (2019): Well, I've got all the ropes, bikes, boats, and skis I need. Pretty much everything referenced in this post has been upgraded since this post was written 7+ years ago as discussed in this 2015 post. I thought it might be interesting now, 7+ years later, to go through these “recommendations” one by one and see whether I took my own advice.
- Well, we certainly grew our income. Our income, net worth, tax bill, savings amount, and giving amount are all a large multiple of what they were in 2012. See that little line about a “side income”? Didn't see that coming. It is true that it is easier to save and spend with a larger income.
- Didn't do this really, except for this Winter with the home renovation. Really most of those checks will be written in 2020 though. Yes, we spent more, but we also save more. For what? Well, partially in order to spend more and give more, but mostly just because we feel the need to be good stewards of what we have been blessed with.
- This one seems prophetic. 2012 was a season for saving and boosting income. 2019-2020 is a season for upgrading a house. Maybe 2021 is a season for giving away a ton of money.
- I'm still not that good at spending, but I am getting better at it.
- Our credit card certainly helps me spend more with less pain. We still use those for convenience.
- Katie still does most of the spending (and decision making about finishes for the home renovation.)
Overall, I think we got all 6 of them. Pretty good advice and pretty good job taking it I say. I ran an a tweet recently about spending; you'll enjoy the reply. ]
What do you think? If you're a good saver, how have you decided when enough is enough? How did your spending change when you hit “enough”? Did you just retire? Did you spend more? Give more? Comment below.