Even though it’s a tough economic time, some Americans are spending more on things like experiences, trips and designer goods instead of prioritizing saving for a down payment on a home or retirement planning or a rainy day fund.
“One reason for the younger generations — millennial and Gen Z — is a feeling of ‘why bother to save?’ said Scott Lieberman, founder of Touchdown Money. “You can see it on TikTok, but many young millennials and Gen Z people feel like home ownership is so far out of reach (and further now with high interest rates) that any kind of savings they may accumulate will be a drop in the bucket when it comes to trying to buy a home.”
He added, “If you think you’re ‘never’ going to afford a home, but you can buy yourself ‘cheaper’ luxuries like designer handbags or experiences, you get to experience that dopamine hit of enjoyment without sacrificing years of saving and scrimping to eventually purchase a home.”
It’s true that, for some, this recreational spending spree is partially due to a ‘why bother?’ mindset, but there are also other factors at play. Let’s explore.
Why Recreational Spending Is Taking Priority Over Saving
To dig deeper into why people choose recreational spending over saving, here’s what Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University, had to say:
“In 2017, University of Chicago Professor Richard Thaler received the Nobel Prize in economics for his work in behavioral finance. The premise of behavioral finance is that human beings are not rational profit maximizing machines, but often succumb to behavioral biases. One of the biggest behavioral biases that humans succumb to is the bias toward immediate gratification over delayed gratification. That is, our present selves tend to win over our future selves. It is exceedingly difficult for many people to imagine their future self and give up that vacation or new car today in lieu of having money to retire on in the distant future.”
This desire for immediate gratification is also heightened by the fact that some people are still trying to make up for the time they lost during the pandemic by choosing to live in the moment and not deny themselves the things they want right now.
“The mantra of many individuals is YOLO (You Only Live Once),” said Johnson. “They rationalize that they will simply enjoy life now and worry about the consequences later. One of the biggest misconceptions is the belief that ‘If I haven’t accumulated enough money by retirement age, I will just continue working.’ Once one gets to retirement age and hasn’t accumulated enough retirement savings, one only has two options left — continue working or accept a lower standard of living in retirement — and neither of them are good.
“One of the more interesting findings of a recent Gallup poll is that people plan to retire at age 66 and are actually forced to retire early at age 62 due to a plethora of reasons, primarily health considerations — their own and those of their loved ones. The option to continue working may not be there.”
Johnson said that he also believes there’s a misconception among many Americans about the standard of living Social Security will provide for their retirement. He said they are in denial that it will be lower than what they expect.
What Are Some Ways To Reprioritize Saving?
If you’ve found yourself spending more than you’re saving, here are some ways to adjust your priorities.
Automate Your Contributions
Johnson said that automating retirement and savings contributions is a smart move. “People should try and automate as many financial decisions as they can,” he said. “One must make saving money a habit. And habits — good or bad — develop over time.
“For instance, have an amount taken out of each paycheck and put directly into an investment fund — most appropriately a low-cost stock index fund. This strategy means you will be putting money into the market whether stocks are rising, falling or treading water. You will practice dollar cost averaging and build significant wealth over the long run.
“Automatic savings plans can take many forms. For instance, one can have a specific dollar amount or salary percentage taken out of each paycheck and put in a retirement plan or savings plan. The biggest advantage of automatic plans are behavioral underpinnings of the plans. If we are enrolled in an automatic savings plan, inertia and the inherent laziness of people tend to work in our favor. That is, once enrolled in an automatic savings plan, people tend to stay enrolled.”
Budget for Savings
“One needs to budget,” Johnson said. “Specifically, one should not simply budget and track expenses, but one should budget for savings. Berkshire Hathaway Chairman and CEO, Warren Buffett is quoted as saying, ‘If you want to make saving a priority, take a look at how you budget. Do not save what is left after spending; instead spend what is left after saving.’
“If one truly wants to make savings a priority, it cannot be a residual — what is left over. It should be a line item on your budget. You don’t successfully build wealth by simply taking what you have left after all your expenses. We accomplish what we prioritize. Prioritize savings and invest those savings.”
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