A propensity to save or spend is seemingly hardwired into our personalities. Most people can identify themselves as either a natural saver or a natural spender. Notice that I say “natural savers” and “natural spenders” rather than savers and spenders. These are not an unalterable states of being. These are just inclinations, not destinies, and most of us are somewhere between the extremes. Natural savers can learn how to spend. Natural spenders can learn how to save.
I see these tendencies in my two college-aged kids, who have seemingly tilted one direction or the other their entire lives. Both have some anxiety about money (and life). Anxiety is not always a bad thing, by the way, and some degree of anxiety probably helped protect our ancestors from predators. For our primal brain, it’s ok to worry about bears.
One child is most anxious about running out of money. They get nervous if their checking account drops below a certain level. They often defer spending to make sure they don’t run out of money. They are a natural saver. Maybe we can call this syndrome FORO, or fear of running out.
For the other child, the anxiety comes primarily from the fear of missing out, or FOMO. They have trouble saying no when their friends are doing cool things. They say yes even when they don’t have any money in their checking account, urgently texting their dad to move money from their long-term savings to their checking account. They are a natural spender.
The kids are alright. Both are fine and generally make good decisions. I use their examples because I know them well and feel like their tendencies are a product of nature not nurture. Our brains are endless fascinating and mysterious to me. The good news is that natural savers are not doomed to become joyless misers and natural spenders are not doomed to become penniless spendthrifts. Natural savers can date and marry natural spenders and have happy, successful relationships. Shocking, I know. Ha! If we're being honest, sometimes a saver needs to be with a spender who can live in the moment. Sometimes spenders need to be with savers who can plan for the future.
Nonetheless, if left unchecked our natural money tendencies can become a barrier to living our best lives. A cash flow system can help.
Our recommended cash flow system includes 4 basic steps:
1) Pay yourself first through payroll deductions into company retirement plans, automatic drafts toward debt repayments and consistent, automatic investments into IRAs, HSAs and other investment accounts. The goal is to save 10%-40% of gross pay for retirement before you even see your take home pay. Neither savers nor spenders can skip this step if they hope to retire with dignity someday.
2) Set aside money for future expenses by auto-transferring fixed amounts each month into individual, designated savings accounts at your financial institution (or use one savings account with "buckets"). For instance, you might set up individual savings accounts for home repairs/remodels, car repairs/purchases, out-of-pocket healthcare costs, and vacations. You should proactively save for any known future expense, even if the timing is uncertain. You should also build and maintain a separate emergency fund sufficient to cover 3-6 months of expenses in case of events resulting in a loss of income. For natural savers, these savings buckets might give them permission to spend since the money is purposefully, mindfully set aside in a savings account. It’s ok to splurge on the vacation because you’ve planned for it! For natural spenders, building cash toward savings goals might help delay purchases until there’s enough money in savings. You need to wait to start the kitchen remodel until you’ve saved enough money, but you’re getting closer every month!
3) Pay your monthly bills, typically through auto-drafts. We often recommend leveling out variable expenses like utilities to maintain consistency each month. Carefully accounting for all your bills provides an opportunity to eliminate or reduce expenses when feasible. Both natural savers and natural spenders should keep their fixed costs, or what we think of as “overhead,” as low as possible to maintain flexibility in the rest of their budget.
4) Spend the rest by auto-transferring the remainder of your money—what’s left over after steps 1 through 3—into a 2nd checking account and using debit cards to spend it. We recommend setting up a weekly auto-transfer into the 2nd checking account each Monday, as it is easier to plan your expenditures over 7 days than 30 days. If you’re married, you can set up as many as 3 of these weekly spending accounts: one for each spouse and one for the family. For both natural spenders and natural savers, a fixed weekly allotment provides a pool of money for guilt-free spending. If the money is unspent at the end of the week it rolls into the following week, giving natural savers a reminder that they can loosen the purse strings. And when the weekly allotment is gone, it’s gone, giving natural spenders a reminder to ration the money so its lasts the entire week. The weekly amounts needn’t be austere, just consistent with steps 1 through 3.
The primary point is that processes and systems can overcome our natural tendencies and allow us to peacefully coexist with money (and our significant others). It’s predominately our savings rate, not our investing acumen, that determines our financial future. Both natural savers and natural spenders can set a savings rate consistent with their goals and use a cash flow system to stay on track.