Spend Less or Save More?

I was sitting in on a presentation by Nobel Laurette Robert Merton who made the comment that not saving enough money (insufficient savings) is the same thing as spending too much money. Given a fixed income, saving more money means spending less money. And spending less means saving more.

Income = Spending + Savings

So, telling a client to “save more and spend less” is redundant. When you do one, you do the other.

And, if you’ve told a client to “save more” or “spend less” (which is the same thing), it means the client has amassed an insufficient nest egg to date – given their spending (or their lack of savings!)

One Move, Two Benefits

Spending less (or saving more) money can be very impactful to a client’s financial plan for the same reason that doing one thing (saving more or spending less, respectively) means doing the other (spending less or saving more, respectively).

When you spend less money, you save more of it. And we know that more money saved now means having more money in the future to fund retirement.  But, spending less money (i.e. downgrading your lifestyle) means having to need to less money to retire.

In short, spending less money has a double benefit, getting you to retirement faster. There are two reasons for this:

• Spending less money means needing a smaller nest egg for retirement – which means it takes less time to reach retirement because you don’t need to save a lot of money to create your nest egg
• Spending less money means saving more money – which means growing your nest egg more quickly, which means you’ll get to your ideal nest egg sooner, which means you can retire sooner.

Living a relatively more modest lifestyle means achieving retirement sooner because of the math behind.

Telling a Client to Spend Less Money

I think it may be a challenge to tell a client to:

Spend less money.

Such a recommendation may be poorly received. Firstly, because you’re telling someone not to do something that they are already doing. Also, because there is the inherent suggestion that you’re taking something away from someone.

The solution to not telling a client to spend less money is obvious, given the above. Instead of telling the client to deprive themselves of something, to not do something bad that they are doing. Flip it – because it’s the same thing anyway. Tell the client something positive they can do to improve their financial picture. Tell the client to:

Save more money.

Of course, this suggestion only works if the client is not retired. But if the client is retired, the conversation is going to be more challenging.