As Human Beings, We're Wired To Be Spenders

Ever upgraded your seat on flight?  Ever bought a $10 salad for lunch?  Ever get Starbucks instead of drinking your office coffee?  How about paying a $4 ATM fee?  

We've all done these things.   And as long as you are paying yourself first, who cares?  If you're saving 20% of your annual income, then make all the "lifestyle purchases" you want!  But if you're not paying yourself first, then you better hope they don't invent a time machine between now and your retirement because your future self will come back and kick your butt.

In my experience, 95 out of 100 people don't pay themselves first.  So if you're in that group who spends first and then saves, congratulations!(?)  You're just like everyone else!

Why are most of us spenders?   There's a very good reason.  And you'll be happy to know it's not even your fault.  It's because we're wired that way as human beings.   

Universal Truth #3 - As human beings, we're wired to be spenders

In the psychology and behavioral finance community, it's called hyperbolic discounting (also known as Present Bias).

People place more value on a smaller reward NOW than a bigger reward later.

As in you really, really want to lose 10 pounds before your reunion in 3 months….but the cake is right in front of you right now!

Or throwing some finance in the mix - your brain fools you into thinking is that a $10 salad today is better than three $10 salads in 20 years.   (If you put that $10 into your retirement savings instead, it'll grow to $67 in 20 years.  With inflation, the salad will cost $18.    So you can get one now or 3 in the future.)  

Behavioral finance is really the study of our monkey brains.    A lot of the instinctive behavior we learned as early humans actually hurts us today.  

When there's a chance you'll be eaten by a sabre tooth tiger, it's good that your instinct is to run from fear.  But when the markets tank, selling everything and running for the hills is the worst thing you can do.  

If you've hunted for two days for your next meal and you don't know when the next meal will come, it's good that you eat now instead of saving for tomorrow.  But when you spend all your money now without saving for tomorrow, you'll be eating cat food in your kids' basement the last 20 years of your life. 

So how can you outsmart your monkey brain?   By not giving it a choice.  If you're dieting, don't walk into the cake shop!   If you're prone to overindulging in "lifestyle spending," pay yourself first!   Pay your future self 20% of what you make before you spend a single dime on salads, or flight upgrades or ATM fees.  Your present self would probably agree it can live comfortably on 80% of your income.

Budget is a four-letter word to most people.  Tracking your spending and saving what's left is a great recipe for failure.   It's much easier to save what you need FIRST and then spend the rest. The feedback I get from clients who have set up automatic savings plan is always "I don't even notice."

So do your future self a favor and pay him or her first.   And then your present-self will thank you for avoiding a time-machine butt-whoopin.