Cracking the Wallet

Jonathan Clements

MOST AMERICANS aren’t saving nearly enough. Last year, we collectively salted away just 3.4% of our after-tax disposable personal income. That’s a far cry from the 9% or more that Americans socked away every year between 1950 and 1984. Since those heady days, our ability to delay gratification has all but disappeared, with the savings rate averaging just 4.8% since 1998.

But HumbleDollar isn’t read by the typical American. This is the place folks end up after they’ve tried dating stocks, chasing hot funds and seeking solace at the shopping mall. By the time they arrive here, they’re ready to settle down and get serious about money. Saving for the future may be a problem for the rest of America. But it usually isn’t a problem for HumbleDollar’s readers.

Instead, the problem is often spending—or, to be more precise, a profound reluctance to do so.

That brings me to a recent conversation with an old friend, Meir Statman, a finance professor at Santa Clara University in California. Statman is the author of What Investors Really Want and Finance for Normal People. I reviewed the latter book last year.

“If I’d known how much I would have at this age, I would have been freer with my spending,” Statman says. He notes that, when he and his wife fly internationally, he now happily coughs up full fare for business class, even though it means paying dollars, while others in business class are forking over frequent-flier points.

He believes the emphasis on delaying gratification can be overdone. “Saving has become a virtue and spending has become a vice,” Statman argues. “Saving is a virtue when you’re young. It’s not a virtue throughout life.”

But Statman also concedes that, for those who are diligent savers during their working years, making the switch to spending isn’t easy. Once retired, “the habits we have developed to be conscientious, to save, to compare prices, become enemies,” he says. “You have to figure out whether you care enough for your future self—or whether you care too much.”

If we’re overly frugal, we need to find some way to give ourselves permission to spend, while also trying not to fear for the future quite so much. To be sure, as we get into our 80s, there’s an increased risk we will need long-term care and all the associated costs. But as we age, we’re also less likely to get out and about, let alone travel, so spending for most retirees tends to slow in their 80s. “Have you ever met anybody who has run out of money?” Statman asks.

HumbleDollar’s readers may indeed care too much about their future self. But what about others, who are saving little or nothing? Statman makes a plea for empathy. “I don’t think we have so many young people who are spendthrifts,” he says. “I think we have so many young people who are squeezed.”

Statman encourages parents to cut their 20-something children a little financial slack. He also says he’d like to see mandatory contributions to 401(k) plans, just as we have mandatory contributions to Social Security. And he wishes companies would contribute more to these plans, especially on behalf of employees with lower incomes.

“People don’t lack self-control,” Statman contends. “They know how to save. What they lack is money. Corporations pay them less, they make them pay more for health insurance, and then we complain that they don’t save enough. And when they do have money, the financial services companies rob them blind.”

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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