Spending vs. Saving: When is Spending Better?
The eternal struggle of spending vs. saving: should you spend on something you really want, or should you save the money instead? Most personal finance advice is geared toward getting people to cut back on their spending and boost their savings — and this is understandable.
After all, the formula for financial stability is to live within your means, spend less than you earn and gradually save and invest to maximize your long-term financial security. It’s always best say “no” to short-term indulgences in favor of long-term financial gains, right?
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Not Surprisingly, “It Depends”
Well, the truth is sometimes more complicated. Many people are constantly told that they need to save more money. And it’s good to make sure that your basic financial needs are covered, you have an emergency fund, and you’re saving for retirement and your kids’ college funds and other long-term needs.
But sometimes striking the right balance of spending vs. saving is not so simple. Sometimes it really can be better to spend than to save — if a few key conditions are met. As Carl Richards wrote in The New York Times, sometimes instead of “saving for tomorrow,” people should give themselves permission to “spend for tomorrow.” When can spending be better than saving? When your basic needs are met, and you have some disposable money that you’re spending on a valuable life experience that is important and memorable to you.
Memories are priceless; time with your loved ones is invaluable. So if you have a chance to take a memorable trip or have a once-in-a-lifetime experience with your family or friends — and you can pay back debt in a reasonable time frame — then maybe you should think about splurging.
Making a Good Spending Decision
Here are a few conditions to follow to “give yourself permission” in evaluating the decision to spend some money instead of saving it:
- Your basic financial needs are covered — you are not currently going into debt just by paying for your current lifestyle and everyday living expenses.
- You have an emergency fund of three to six months’ expenses.
- You are saving for retirement. If you have nothing saved for retirement, maybe give yourself a few more years of getting to the point where you can save for retirement before you make a big expenditure.
- You’re spending on “experiences” instead of just “things.” Studies have shown that spending money on experiences like travel tends to make people happier, and for longer, than spending money on material things.
It might sound strange to give yourself permission to spend money. But some people need a bit of extra encouragement to think strategically about how to get the most out of their spending experiences.
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Instead of buying “things,” buy memories. Invest in spending time with your family and deepening relationships with close friends. Money can’t buy happiness, but it can help you spend more time with the people who make you happy.
Someday when you reach retirement age, in addition to a well-funded retirement account, you’ll want to have a rich network of loved ones who have shared in your lifetime of memories.