The Big Switch from Saving to Spending

[SnackDog]

I have always been naturally frugal and value-oriented regarding spending.  Not reluctant to spend on things which bring great joy, but not into waste whatsoever.

We have been in savings mode the last 20 years or so.  I try to hold on to every nickel i can as a huge fan of investment returns and the magic of compound interest. This means we save heaps and forgo many expenditures our friends and colleagues do not.   Part of this is deferred gratification - saving now will allow more spending later. 

I'm not sure we'll ever be free spending, but one thing I am looking forward to in retirement (still a few years away) is having a quasi-fixed income and spending it all each year. No savings required!  Want to splurge on something expensive? Work it into the annual budget.  Need a new car?  Work it into the 3-5 year budget.

The idea of spending the entire allowance annually is a bit intoxicating. I didn't even do that with my weekly allowance when I was a kid.  I used to iron my paper currency to keep it looking nice before depositing in the bank.

I'm thinking we will have an annual budget with say 15% contingency for a home maintenance surprise or huge medical bills. If it is not needed, we blow it in January the next year on a vacation or toy of some sort.  Maybe we donate it.

How is this working for you retirees?  Are you comfortable spending your allowance??

[arebelspy]

I'm sure my answer will be different than a lot of the posts, as we seem to approach money differently than most people (even Mustachians), so you'll probably get a lot more than will be relevant to you, but wanted to throw out another viewpoint. :)

We didn't set a budget when working, and we don't have a budget now.

Instead, we spend what we want, and occasionally (months later) look at what we're spending.  While working we'd check that number to calculate a time to FIRE (based on a rough guess of how much we might spend).  Now it's to see if our FIRE is sustainable, or if we need to earn more money, or what.

For example, we FIRE'd in June 2015, but (as teachers) received paychecks through August 2015, and then left the states at the end of August 2015.

I didn't look at our spending for nine months, until June 2016.  Haven't looked at it since (5 months or so).  I'm considering not even tracking it anymore

It's just not that interesting, to me, to look at spending or budgets or try to see if the amount we eat out is above or below some arbitrary number we set.

It might be worth trying out, for a bit at least, both before and after FIRE.  Spend to a level you're comfortable with.

Maybe not, if you constantly have to reign yourself in currently, every month pushing against your budget and depriving yourself.  But if you naturally spend pretty little, are happy with your spending, but want to splurge some... just do it.  Track the spending afterwards, so you can look at it, but don't bother trying to hit a budget, or spend except where you want to.

Then check up, see if you're still hitting savings goals (and, after FIRE, see if you're around a 4% WR, or even a bit more, but if your portfolio is trending up).

If you have a naturally frugal mindset/disposition (or one cultivated over years of saving for FIRE), it may work better than you think.  It'll reduce your thinking about money, and allow you to have those splurges, without adversely affecting anything.

Like I said, maybe a bit different, but hopefully might give you (or someone else) something to think about. :)

[Metric Mouse]

I have always been naturally frugal and value-oriented regarding spending.  Not reluctant to spend on things which bring great joy, but not into waste whatsoever.

We have been in savings mode the last 20 years or so.  I try to hold on to every nickel i can as a huge fan of investment returns and the magic of compound interest. This means we save heaps and forgo many expenditures our friends and colleagues do not.   Part of this is deferred gratification - saving now will allow more spending later. 

I'm not sure we'll ever be free spending, but one thing I am looking forward to in retirement (still a few years away) is having a quasi-fixed income and spending it all each year. No savings required!  Want to splurge on something expensive? Work it into the annual budget.  Need a new car?  Work it into the 3-5 year budget.

The idea of spending the entire allowance annually is a bit intoxicating. I didn't even do that with my weekly allowance when I was a kid.  I used to iron my paper currency to keep it looking nice before depositing in the bank.

I'm thinking we will have an annual budget with say 15% contingency for a home maintenance surprise or huge medical bills. If it is not needed, we blow it in January the next year on a vacation or toy of some sort.  Maybe we donate it.

How is this working for you retirees?  Are you comfortable spending your allowance??

I guess I don't set a budget. Why would I?  I track spending occasionally, but over the past several years of retirement, my 'stache has only gone up. As long as I'm in the black over the long-term (5-10 years) I don't worry. I splurge on literally everything; I can't imagine setting an arbitrary limit on spending, or waste time trying to calculate exactly how long my roof will last so I know how much to set aside.

I'm not sure how your mindset will change in the future - right now you have income; don't you work expensive stuff you want into the budget now? Or is it too painful to spend on something like a new car?

[pbkmaine]

We don't budget either. Instead, My husband and I each have what he calls a "slush fund". It's a savings account we are free to spend as we like, no questions asked. Interestingly, having it there makes us less likely to buy stuff. DH is a retired IT guy, and was talking about the Windows Surface Studio tablet the other day. He has the money in his slush fund. I told him to get it if he wants. No, he's going to wait.

[momcpa]

I'm on the brink of retiring.  Going part-time at work starting Feb 1, 2017.  The idea is to continue that way for 10 -12 months and then be done.  My husband will probably retire at that point also.   The financial person we talk things over with, just commented to me the other day that my husband and I have been REALLY good savers.  We don't go without but we don't go to extreme measures to save.  Anyhow he said he thinks we might be the kind of couple that has trouble "flipping the switch" from savings to spending.  He assured me that we have sufficient savings and should now enjoy it a little bit.  We'll see how that works out.

[Cassie]

I know what we spend but don't track every penny, etc.  We have been spending more $ on vacations the past 3 years then we ever did. We took a vacation in Aug and are taking another in Dec.  However, it looks like my DH is going back to work for a consulting gig that will last 2-3 years so that will again limit our vacations together to 1 per year.  I am planning to go visit 2 of my sons in Jan so will go without him.  I also look ahead to items we might need in the future. For instance when our 11 yo fridge died this summer it was not a total shock.  I am a planner by nature.  We pretty much go to events or out to eat when we want to.

[secondcor521]

One thing that I did that tremendously helped me transition mentally:  I was saving a large portion of my income (about 60% IIRC).  Historically I had my paycheck directly deposited into my checking account and then moved money from there to savings.  About two years before I retired, I switched it around and had my paycheck deposited into my savings account, and then I set up a once monthly transfer from savings to checking.  This did a couple of things for me:  now I was living off of savings and sort of not receiving a paycheck, which simulated a little bit what happens in retirement.

Having been FIRE about a year, I am still a careful spender, but from a budget perspective I only track a few things:  (1) Am I under 4%?  Usually the answer is yes.  I have been bouncing between 2.5% and 3.5% depending on the market and on my lumpy expenses.  (2) Is my 5-year-Roth-pipeline intact?  Fortunately it has grown to about seven years or so due to some unexpected income over the past year.

[Cannot Wait!]

Not spending is a surprisingly hard habit to break!

[Mr.Tako]

Like others here, we don't really budget or set aside funds for amusement.  There is no allowance.

Mrs. Tako and I have joint cash accounts and personal cash accounts.  General household items tend to come out of the joint accounts, and personal expenditures (aka entertainment, gifts, hobby items), etc come out of our personal accounts.

If possible, I try to make my hobbies either free (by being resourceful), or paying for them with micro-jobs.

So far this has worked out great.  Our net worth has continued to climb over the last year, and nobody feels deprived.

[arebelspy]

One thing that I did that tremendously helped me transition mentally:  I was saving a large portion of my income (about 60% IIRC).  Historically I had my paycheck directly deposited into my checking account and then moved money from there to savings.  About two years before I retired, I switched it around and had my paycheck deposited into my savings account, and then I set up a once monthly transfer from savings to checking.  This did a couple of things for me:  now I was living off of savings and sort of not receiving a paycheck, which simulated a little bit what happens in retirement.

That's really clever.  I like it.

[Metric Mouse]

I'm on the brink of retiring.  Going part-time at work starting Feb 1, 2017.  The idea is to continue that way for 10 -12 months and then be done.  My husband will probably retire at that point also.   The financial person we talk things over with, just commented to me the other day that my husband and I have been REALLY good savers.  We don't go without but we don't go to extreme measures to save.  Anyhow he said he thinks we might be the kind of couple that has trouble "flipping the switch" from savings to spending.  He assured me that we have sufficient savings and should now enjoy it a little bit.  We'll see how that works out.

I think thats the first time ive ever heard of a financial professional saying that anyone had actually saved enough.

[Ozstache]

How is this working for you retirees?  Are you comfortable spending your allowance??

Initially I was too frugal, leading to a massive underspend. I now use my budget to consciously plan to spend what would become excess on what I would previously have considered frivolous items/activities and track to that. It is working.

[arebelspy]

How is this working for you retirees?  Are you comfortable spending your allowance??

Initially I was too frugal, leading to a massive underspend. I now use my budget to consciously plan to spend what would become excess on what I would previously have considered frivolous items/activities and track to that. It is working.

Nice.

We've considered this, and have consciously tried to up our spending in a few areas (though I don't think we've been too successful).

I'd be curious to hear more about this--how you decided on numbers, how strictly you follow it, etc.

[WerKater]

One thing that I did that tremendously helped me transition mentally:  I was saving a large portion of my income (about 60% IIRC).  Historically I had my paycheck directly deposited into my checking account and then moved money from there to savings.  About two years before I retired, I switched it around and had my paycheck deposited into my savings account, and then I set up a once monthly transfer from savings to checking.  This did a couple of things for me:  now I was living off of savings and sort of not receiving a paycheck, which simulated a little bit what happens in retirement.

That's really clever.  I like it.

+1
I'll absolutely try that when the time comes.

[Ozstache]

How is this working for you retirees?  Are you comfortable spending your allowance??

Initially I was too frugal, leading to a massive underspend. I now use my budget to consciously plan to spend what would become excess on what I would previously have considered frivolous items/activities and track to that. It is working.

Nice.

We've considered this, and have consciously tried to up our spending in a few areas (though I don't think we've been too successful).

I'd be curious to hear more about this--how you decided on numbers, how strictly you follow it, etc.

We have always tracked to a budget, even in retirement, so it was pretty obvious how much the excess would be. It was then simply a case of adding in expenses for items/activities that still met our core values (minimalisation, value for money, would be utilised a lot) but would not have otherwise made the cut during our stashing years.

Eg. recently I upgraded the video card in my computer (GTX 1060 for anyone curious), despite the existing one being good enough for games a year or two old. I have been playing computer games a lot lately, some fairly recent games, so to me I would get good use of it and the model I chose was the budget performance card, so met my value for money requirement. I gave my old card to my son, giving him a boost from what he had. In the past I would have waited another year or two to upgrade but now I say why not? I am very happy with the boost my games hsve received from this 'frivolous' upgrade.

We don't end up getting/doing everything extra we plan, but for the most part we achieve it. We still have an underspend, which feels good from a contingency perspective, but it is nowhere near as big as it used to be. Importantly, we have not lost sight of the fact that these are luxuries that are only nice to have while we have the means, so if anything happened to our stash these items would be the first to be dropped off the budget.

[arebelspy]

Makes sense.  Thanks for the clear example.  :)

[SnackDog]

Interesting range of responses.  I am definitely a planner so there will be spreadsheets covering all aspects and an annual budget.  I reckon we will end up under-spending and need to make donations to charity each December.  I think our biggest issue may be actually finding things/activities we find high value in.  The video card is a good example of incremental value.  We just hate waste.

One of our biggest decisions will be where to live.  I may have a strong incentive to reside at least the first year of retirement in a state without income tax, which is definitely not our current state of tax residence.  We may be faced with selling a home and buying or renting one in a different state.  If so, resetting the total volume of funds available during retirement may occur when sinking some into a home. Alternatively, we may take out a fresh 30 year mortgage and move some equity into the retirement kitty.  Paid off properties sound great, but investible cash parked in a building is not so appealing.

[robartsd]

One thing that I did that tremendously helped me transition mentally:  I was saving a large portion of my income (about 60% IIRC).  Historically I had my paycheck directly deposited into my checking account and then moved money from there to savings.  About two years before I retired, I switched it around and had my paycheck deposited into my savings account, and then I set up a once monthly transfer from savings to checking.  This did a couple of things for me:  now I was living off of savings and sort of not receiving a paycheck, which simulated a little bit what happens in retirement.

I've always done this when not living paycheck to paycheck (a rare situation for me), basically followingYNAB's live on last month's income principle. It's great to know that your bills will be paid on time even if something goes wrong with your pay.

[tonysemail]

One of our biggest decisions will be where to live.  I may have a strong incentive to reside at least the first year of retirement in a state without income tax, which is definitely not our current state of tax residence. 

here is an interesting article I read recently about fleeing california income taxes.
It seems to say that it may take more than a year to establish residency in another state.
Somehow it seems unfair, yet I can appreciate the intent.

"If you’re in California for more than 9 months, you are presumed to be a resident. Yet if your job requires you to be outside the state, it usually takes 18 months to be presumed no longer a resident."
http://www.forbes.com/sites/robertwood/2016/11/21/as-trump-tax-cuts-emerge-high-13-3-california-tax-spells-exodus/#3ff3490e27f3

[RetiredAt63]

Your state rules make life complicated.  In Canada you file income taxes based on your Province of residence as of December 31.  That is it.  And all income is taxed together, so if you live in one province and work in another (easy with Ontario/Quebec) you get taxed by your residence location, not your work location.  Lots of people have been known to plan a moving date around this.  It does take longer to establish residency for health care, but normally your old one carries you through - i.e. when I moved from Quebec to Ontario, my first 3 months in Ontario were covered by Quebec, then I was covered by Ontario.

Now that Americans are jealous [ ;-) ] back to the question.  I have 2 regular banking accounts - the regular bills (mortgage, insurance etc.) come out of the chequeing, and so do cheques and bills for this and that (new roof, car maintenance, etc.).  The other pays for ongoing life expenses, which is basically food, gas, meals out, clothes.  I put a set amount in twice a month and challenge myself to underspend it.

When I was first retired I was a bit worried about $ because I had recently separated and had lawyer fees and such.  Now that things are settled I find I spend less than I make, so I too need to up my frivolity.  Seriously, this year I paid for having my roof totally reshingled, and the back deck took major repairs, and I still had a surplus.

[Playing with Fire UK]

This blog article may be of interest:

https://sexhealthmoneydeath.com/2016/09/28/financial-swing/

Content is SFW but domain name can get blocked by some work networks.

[Cassie]

Interesting article. It was not painful for us because we had pensions and each still bring in some income.  Spending money on vacations even when it comes out of savings, etc does not feel bad at all.  We are also way older then most on here and realize we can't take it with us:))

[Bateaux]

My entire FIRE plan was based on the ACA subsidy.  Trying to retire by 50 only two years to go.  Now unsure if the ACA gets trumped.

[arebelspy]

My entire FIRE plan was based on the ACA subsidy.  Trying to retire by 50 only two years to go.  Now unsure if the ACA gets trumped.

You have plenty of time to see what happens.  Save as much as you can in the meantime.  Nothing's changed, yet.  If it does, adjust and adapt.  :)

[SnackDog]

This blog article may be of interest:

https://sexhealthmoneydeath.com/2016/09/28/financial-swing/

Content is SFW but domain name can get blocked by some work networks.

The horror at spending in the blog article is scary.  I am a natural saver, not a spender.  In this regard, the rental investor crowd have it better as they have an income off which to live instead of slowly grinding down their pile.  Only it would be hard for me not to treat that like a job.

[Playing with Fire UK]

This blog article may be of interest:
https://sexhealthmoneydeath.com/2016/09/28/financial-swing/
Content is SFW but domain name can get blocked by some work networks.

The horror at spending in the blog article is scary.  I am a natural saver, not a spender.  In this regard, the rental investor crowd have it better as they have an income off which to live instead of slowly grinding down their pile.  Only it would be hard for me not to treat that like a job.

I'm not in decumulation yet, but when I first got out of MegaDebt and wanted to ease up on my scarcity mindset I set up a bank account that was only for frivolous or indulgent spending and put a fixed amount in there every month. It went straight from my paycheque so I never felt the pain of seeing it go and just got to see the money appearing. Obviously it wasn't magic free money but it really helped in the short term to reset my thoughts on spending. I don't use it any more as I'm much more comfortable with my spending levels and knowing what will make me happy.

I got the idea from someone who had recently retired and got a settlement for an awful industrial experience. They didn't feel good about the money until they decided that they were going to use it exclusively for fun and donations.

When I get to that stage I'm going to automate it as much as possible. I don't want to go through SHMD's experience every month. I'd also consider depositing more than I need into my current account so that I can transfer out my 'savings' at the end of the month.