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I DON’T LIKE SPENDING, though the older I get, the more I loosen the purse strings. Still, I rarely enjoy spending money. I think I got this from my mother and grandparents.
My grandparents reused Christmas tree tinsel year after year. My grandfather removed every strand—made of metal back then—and placed it in a box for the following year. My grandparents also had two sets of rugs, one for winter and the other—made of woven rattan—for summer. That was to preserve the “good” rugs.
Both my mother and grandmother reused aluminum foil and plastic wrap. Nothing was ever purchased unless it could be paid for with cash. My parents couldn’t afford to buy a house when I was growing up. I wonder if this was the cause of my mother’s concern with spending.
My mother once sold my father’s toy train engine, which he’d had since age 10, for $100. She was 11 when the Great Depression hit, so she may have been affected in ways I can’t understand.
In any case, I was influenced by their habits. After I’ve accumulated money in, say, a savings or investment account, I hate to see the balance drop.
What if the money isn’t earmarked for savings, but rather for spending? Before I spend a penny, I need to know where the money is coming from. I like to accumulate money for designated purposes. Once the money is there, I can easily spend it for the intended purpose.
One of our bank accounts is labeled “travel.” If Connie and I go to Florida this winter or if we’re able to travel again, I’ll have no trouble spending that money. I’d be happy to get a suite on a ship, or fly first class, or stay in a nice hotel. On the other hand, if the same amount of money sat in an account designated “contingencies,” I’d conclude there was no money to travel.
I find my money mood is affected by the stock market. I feel less restrained in my spending if our investments have increased in value. I feel the opposite when our investments decline, even though there’s no connection between our investments and the money we live on and spend.
I think I’m affected by a financial bipolar disorder, if there’s such a thing. If our portfolio rises sharply, I feel overly comfortable. Meanwhile, when a bad market day shocks me, I find myself looking up the difference between our portfolio’s value a year ago and its value today. That usually makes me happy again.
These days, I find it much easier to simply give money away. We tip generously and in cash. We’ve increased charitable donations, including using qualified charitable distributions from our IRAs. But my greatest satisfaction comes from helping family.
It’s not a matter of throwing money at them, but helping them get past financial emergencies and perhaps help them avoid future stress. When the washer or dryer goes, or bats invade the attic, or major car repairs pop up, or health bills overwhelm a family member, why wouldn’t we help?
“When the washer or dryer goes, or bats invade the attic, or major car repairs pop up, or health bills overwhelm a family member, why wouldn’t we help?”
Just wondering: when you talk about helping family members, does this include extended family? Cousins, nephews, nieces, etc?
I have several extended family members that always seem to need money for house repairs, cars, paying bills – and seem to feel all the older members of their extended family should be happy to help.
I’m not all that close to these folks, other than seeing them on holidays, and admit I resent being asked. But feel guilty if I refuse. Sigh.
Children
Money = security to me. It’s not about things or experiences I can buy with it. It’s to keep me “safe” in a dangerous world that can be cold and cruel to those without financial resources.
History is filled with stories of dangerous regimes where desperate families cannot buy their children’s way out to safety – they didn’t have enough $$$ to bribe the right people.
Those falsely accused of a crime who can’t afford a top lawyer often put their lives in the hands of an inexperienced or overwhelmed public defender with expected results.
Too many dire healthcare examples: outcomes of a top doc, surgeon, oncologist vs those in a very restricted HMO network.
Every time I spend, I feel like I lose a bit more life safety. I recognize that this is a dysfunctional mindset and I’m striving to overcome it.
My wife and I had an interesting experience when trying to help her sister who was going through financial struggles. She was in the early stages of grappling with MS, lost her job, had limited savings/income and had not yet qualified for any form of government support. We gave her some money but when offering to help further it simply created resentment. We have learnt that providing ongoing emotional support and occasionally helping with tasks when we visit is far more gratefully received.
In a recent article of yours you bemoaned the inadequate funding of social security. Now you seem to brag that you give servers cash tips so they can avoid paying social security and income tax. Do you not see the incongruency?
I don’t see where Richard says he pays cash so the recipient won’t pay taxes on the income.
I always over pay a restaurant bill in cash, and say ‘keep the change’.
Clearly the HD community does not agree with my comment. After some reflection I realize I am wrong. Apologies to Quinn.
Many people give cash tips because they don’t trust management to fairly distribute the tip portion of the credit card charge to the servers.
By “earmarking” accounts I think you might be making management of your spending from a macro point of view difficult. As you have described your situation in various articles and posts, the vast majority of your spending is covered by pension and SS. I will just guess that that is 80% of your spending. Your next described source is from IRA RMDs. And finally, you have some other designated pots of cash you have for emergencies etc.
If you were to add all of your financial assets (excluding any valuation of your pension or SS),but including IRAs and come up with a number, you would then be like myself and other folks without pensions wanting to know how much you can safely spend.
You could calculate your asset allocation of these funds between equities, bonds, and cash. If this works out to 50-60% in equities, you could then withdraw say 4% of this total amount to spend each year. Over time, your total investments should last providing income for say at least 30 years.
I am going to guess that over your years of retirement, your financial assets have grown, meaning that your withdrawals from spending are less than 4%, perhaps as little as 2%. You might try going back a few years and calculating what your % was.
Then, on a going forward basis, you could plan to spend up to this % of your financial assets each year. This could help you feel more comfortable and even let you spend more.
So, for myself, in a normal year without any surprise expenses, SS might provide 50% of our spending. We can then spend an additional amount up to say 3.5-4% of our previous year end total financial assets. Following this approach for our 23 years of retirement has been a successful path for us. Most years our total permitted spend amount has grown compared to the previous year.
100% of our spending is covered by my pension and SS, with money left over. Never have used withdrawals from IRA or other investments. RMDs are given away to charity and family and reinvested after taxes.
If I didn’t have a pension, I would have annuitized a sufficient portion of assets to cover ongoing expenses and then used dividends and interest as additional income as needed.
My personality could not handle trying to determine annual withdrawals from investments.
Sir Richard,
Thank you. I was also a penny hoarder in my youth to an unhealthy extreme. That was the building phase and now, being in the distribution phase, I turned on all my retirement funds as annuities. I’m done with thinking about earning more and made the mindful transition to spending freely.
That really IS freeing to the mind.
I recently told a lady that having more money than needed enables one to be a blessing to others. She is in her mid 50s saying she can always make do with what she has. I’m sure by limiting her lifestyle.
My comment was to show her another way to think.
I enjoy your thoughts!
As I am sure you know, your situation is extremely unique driven no doubt by your almost 50 years of single employer employment. That length of employment of course would not likely happen today and because of the absence of pensions wouldn’t lead to someone ending in your financial shoes even if they worked for one entity for 50 years. You are indeed fortunate that your circumstances match up with your personality….
It might be a fun experiment for you (if you have not already done so) to go to one of the annuity sites such as immediate annuities.com and using the age at which you retired find out how much it would take for a person that age to purchase the equivalent of your pension in an annuity. I just did a quick peek for a 68year old male in NJ and it’d looks like today it would cost $1.5M for $10k/month. I am guessing that your pension is larger…..And, since for most people today, those funds to purchase the annuity would come from an IRA or 401k and they would pay tax as you do on the pension payments…..
Yes, it is unique. However, 50 years was never normal. Except in some industries job tenure rarely exceeded 5-6 years even decades ago. Plus pensions were never available to the majority of workers and as was said, you need long service to make a pension truly valuable.
I have run those annuity numbers just out of curiosity and it came out to several million dollars. If I had to purchase an annuity I would use after tax funds to make much of the payment tax free and I would have purchased an annuity just to cover basic living expenses.
Not much in my financial life or lifestyle would be the same without the pension. I would have had to save much more and I would be using assets that I don’t use now and are still accumulating.
However, our total portfolio 50/50 qualified and non qualified from six decades of saving and reinvesting generates substantial income from capital gains, dividends and interest.
There was a price to pay for that pension, but I’d do it over again. I remember many fellow workers who didn’t stay and moved on and were going to set the world on fire and for a time they did leave me in the dust. Years after they left I received a call from one fellow who bragged at what he was making. If true, he was making a bit more than me at the time. Then he told me he worked a lot of OT on the night shift in an elevator factory.
Bucket allocations always seemed to me to be a personal finance tool for those who were not “good with money” I.e. If they had it they spent it. They’ve been reinvented of course in many banking apps these days for new generations.
But facing a rest of life decumulation (as I think many without defined pensions will have to do) I have begun to think of their utility for someone naturally thrifty to have “permitted” and worry free spending.
Don’t think I’ll go as far as having specific capital spend pots. Maybe notionally I’ll accrue “surplus” in year allocation to an existing contingencies notional reserve.
And a good point made by Dan Smith below that buckets and budgets are really 2 sides of the same coin. So despite his protestations maybe Mr Quinn is a budgeter after all?
A stake through the heart, ye gads budget? No, please no.
To me budget means sitting down in advance and deciding that in the next year or whatever we will allocate/assume we will spend $5000 on dining out and $300 on car repairs and we stick to that budget.
On the other hand, we have no travel budget in advance, we put in the travel account what comes in each month – actually SS payment.
We may or may not spend it and haven’t in the last year. If we go to Florida this winter, it will be wiped out, if not it will accumulate.
There is no rule we can’t spend more as in following a budget.
I and we have never been at a point where we were “not good with money” as in not living within our means.
That is true from the day we were married until last night when we had leftovers for dinner we brought home in doggy bags from a restaurant the night before.
I think you’re rather over thinking what I suspect most people mean by budgeting. To me it’s more like what is my base level of bills and living expenses including grocery store. Is is likely to increase -voila an essentials budget. Then lifestyle – the everyday quality of life stuff for activities, entertainment, meals out, discretionary area travel. Then luxuries – the big travel, wants v needed goods etc.
The whole process is not necessarily more complicated than flicking through a year of card /debit statements and adding a personal inflation number
Of course those buckets/pots/ jugs are fungible but as long as the annual total doesn’t exceed the drawdown target I have then happy days.
Obviously if you are going to apply a strictly hypothecated, not a cent more absolute fiscal constraint kind of budget then there’s a whole lot more work for almost no gain for most. I’d just be grateful I’m not in that situation out of necessity to make rent each month or pay a health insurance premium etc.
This is a common corporate approach to budgeting. It’s not what the vast majority of individuals would refer to as budgeting. Heck before the introduction of MINT (RIP) I didn’t know people who tracked their categories. Back then it was more, I give myself a weekly allowance for free spend.
I think you are misinterpreting the point of bucket portfolios. They are not meant to be buckets for spending per se, but as a diversification tool.
Bucket One contains 1-2 years of spending in cash. This is to safeguard these fund for short term spending.
Bucket Two is 8-9 years of spending money short term bonds.The purpose of this bucket is to have a relatively safe amount of money in case of a market downturn. Since most market slumps las less than 10 years this allows the investor to not have to harvest equities to fund spending in a depressed market.
Bucket Three is the balance of your portfolio invested in only stocks for long term growth.
The basic precept is annually the investor rebalances the buckets from assets that have grown over the past year.
So in other words you refill the buckets on a schedule, but have the ability to sit tight as well during a bad year in the market.
So the buckets are not a “personal finance tool for those who were not good with money”, but a smart way to diversify your portfolio, but you are right that it is a tool to, “their utility for someone naturally thrifty to have “permitted” and worry free spending”
The term “buckets” is used in different ways in personal finance. There are buckets for different goals — college, travel, remodeling — and then there are buckets for retirement income over time.
Yes thank you Jonathan. Bucket is clearly an imprecise term and is used in both long-med-short diversification and short term expenditure allocation.
Maybe the personal finance industry can align and assign specific meanings to hose, bowser, bucket, jug/pitcher and glass/cup. Then there is the question of mains pressure ( comfortable corporate earnings) vs hand pumping ( eking out surplus saving on a low wage) 😉
I always wonder why the term bucket emerged, I remember the envelopes from my childhood. I guess with email envelopes became less ubiquitous
Not on the Sopranos. In one episode a guy pays up some cash without an envelope and gets scolded for it.
Thanks for this good article, Dick. Hoping to get to the place you and Connie are in with helping the kids. Our thought now is to not be a financial burden to them as we age. We are only in first year of retirement and finances haven’t shaken out yet. Chris
Mr. Quinn I enjoy reading about your financial journeys. We all have our own path and it’s that they work for us that’s important.
PS Kudos to your wife on retrieving the engine, what a great example of not letting circumstances control you, but rather being proactive and fighting for what you want. From strength to strength
I’m lucky that I’ve never been called upon to help my kids financially, but I certainly would if the need arose.
You and i have different approaches to spending, though we both end up in the same place. Your bucket approach keeps you on track without much need to worry about having a budget.
We have a budget. Aside from our disaster fund parked in a high yield savings account, we have no buckets, just a single joint checking account.
In January I look back on how much money flowed from it the prior year. I divide that by 12, make a few adjustments for inflation, and that’s my monthly deposit to checking. It hasn’t failed me yet.
We have used buckets for twenty years. We have a “everyday” bucket, a “car savings bucket”, and a”travel bucket”. Because of them we have paid cash for every purchase from these buckets for all of those twenty years.
I was pondering your preference to save amounts in bank subaccounts earmarked for spending, e.g., travel. Perhaps the mental accounting benefit to you is that by having put aside the amount into that subaccount, you have already “spent” it, but since you still have it, there’s no pain of loss. Then by the time you take it out for that purpose, it feels like a sunk cost, so you still don’t feel any pain of loss.
For retirees who are unhappy making the switch from accumulating to decumulating, the subaccount method might be worth considering.
I read your entire article and kept going back to the opening comment about tinsel. Tinsel was originally created to make a Christmas Tree look like it was draped with icicles. That stuff your grandparents saved may have been made of lead. Lead-based tinsel was eventually eliminated because handling lead is a health hazard. Nowadays tinsel is usually made of PVC with a shiny finish. Mankind has not yet reached the point of eliminating sources of microplastics, but it’s possible tinsel production will change again in the future.
I remember the tinsel falling on the train track under the tree and shorting out the trains.
Jeff, interesting point you make about tinsel. The really exciting feature used to be when a strand of it fell off the tree and somehow managed to find its way across both prongs of the slightly ajar Christmas tree lights plug in the outlet.
GW – Interesting? Or unsafe? 🙂
One issue I have in spending is that I don’t want to spend money on items that are grossly overpriced even though I can easily afford them. Things like paying $15 to go to a tiny museum with a few pieces of memorabilia on the wall or spend $5 to walk up a fire tower to get a little better view that I know really won’t be much better than I have already seen.
The other issue is the constant stress of not having any guaranteed income streams besides social security and knowing that it will be cut significantly in the future. Annuities are only as good as the companies that back them and we know that they can go out of existence in an instant so I don’t see them as an option.
Thanks for your insights!
Sounds like it works for you. We have no need for separate buckets – we have just one – but can understand the appeal.
I wonder what the adverse effects of not claiming cash tips as income has on a server’s future Social Security benefit?
Dan, this is an intriguing question. I couldn’t;t help y self so I created a simple spreadsheet. This is very simplified and based on some quick Google of average wage data for servers. Here is some of the data I found. Full disclosure – I didn’t do exhaustive research on these numbers. I used the 2023 SS benefit formula for calculating the PIA – Primary Insurance Amount – or monthly benefit at full retirement age.
This analysis implies the server made the same inflation adjusted wage for the 35-year career that the SSA uses to calculate benefits. The biggest insight to me was that for servers and bartenders, about 50-60% of their yearly wages come from tips. I’ve done lots of tax returns for servers, and I’ve never seen a W-2 with that type of ratio. I imagine most servers fall somewhere in between the “no tips reported” and “all tips reported”.
Lots of us feel that a $dollar now is worth more than $2dollars – possibly – later.
Trying paying your mortgage saying to the holder “I’ll give you twice as much 20 years from now.” I wonder how well that would work?
Thanks Rick. Now let’s go a step further and consider the effects of either not claiming cash tips, or not taxing any tips, on refundable tax credits such as the Earned Income and Refundable Child Tax Credits. In other words will a servers lower taxable income cause an increase in government spending due to larger tax credits?
Dan – Yep, this is a complicated analysis. I think MaxIFI software tool could handle the individuals situation, determining the optimal choice for them. It the macro-economic considerations on the nations taxes is beyond me.
I’m not a good spender, either, though I’m re-evaluating my money goals as I’m reaching or surpassing the saving targets I set years ago. I’ve also favored numerous buckets–or actually little pails–for various categories of saving-to-spend money. But I’m moving toward one big washtub to draw from for everything. I’d like to say I’m learning to modify my thinking about how others should use their money, outside of the basic prudent principles that exemplify the HD approach, but I still find I’m biased my own choices. Do you think we’re destined to live out our life-long habits of thought, or can we change when presented with a better way?
Richard, yes a bit extreme but everyone has psychological barriers/ feelings about money. You were raised with frugal examples that served you well during your accumulation years.
As often discussed on another board I participate on (FIRE) the decumulation phase can be difficult and stressful to adjust to for many. That’s a shame because most of us worked hard stayed disciplined and sacrificed for many years to get the wealth that we now have. It is time to enjoy it.
BTW, I too try to tip generously and in cash. The reactions and service provided is very gratifying.
My mindset in retirement at this phase of life is that having Money is not Happiness, but it can help to provide the great life experiences that make us Happier!