I’ve had many conversations with clients and prospective clients over the past few months where there has been a sense of shock, and dare I say almost embarrassment, over levels of spending. It’s probably cropped up more this year than the rest of my career put together.
Part of this is of course inflation, which has been almost 30% over the past 5 years1. Someone who saw their spending edge up from about £6k p.m. to £7k p.m. over the previous decade will have seen that spending surge to over £9k p.m. about £110k p.a. over the past 5 years (if increasing with inflation). Going through that six-digit barrier also having an outsized emotional impact.
It’s an important subject too, a key component of any financial plan. For those building towards retirement or in the early years of it, variations in assumed spending levels will often be the single most impactful issue.
In this blog, I thought I’d discuss a few of the insights we’ve learned, both from our clients and other planners/speakers. In particular, how do you go about making healthy, sensible spending decisions.
“Unmindful” Spending
One of Martin’s favourite sayings; broadly it’s the opposite of mindful spending. And crucially for retaining clients, a bit politer sounding than mindless spending.
For example, simply spending until the bank card/balance says you can’t each month (and we have come across very wealthy people doing this). An ‘I see it, I want it’ approach to spending.
‘Lifestyle creep’ is a well established behaviour – as incomes increase, peoples spending increases accordingly. The problem is that it’s far harder to reduce spending than to increase it. If income reduces, the adjustment can be painful. We see this starkly with high earners retiring who’ve not undertaken sufficient planning – the spending that a £300-£400k salary can facilitate requires a lot of capital to replace it.
People make spending decisions in isolation; “can I afford that”. They very rarely compare what else they could use the money for. E.g. you can afford that new car, but would you prefer that or to keep your 3-year-old car for a bit longer and go on a couple of nice holidays?
This silo thinking is even worse across time periods; people don’t think in terms of spending now vs spending in the future. E.g. you can afford that house extension, but would you prefer that or to retire 5 years earlier?
This topic also came up at a recent conference we attended. The excellent Morgan Housel, spoke about the concept of enough. He talked about the amount of money people spend to impress others; spending on trying to have lifestyles other people think they should have. They don’t consider what they actually need to spend to be happy; what is “enough”.
Three Limits to Spending
The above assumes that money is a limiting factor to people’s spending and lifestyles. But we meet many people for whom that is not the case.
Martin once asked one of Collingbourne’s earliest and most successful clients, called Tony, what stopped him from spending more, given his considerable wealth. He replied that there were three limiting factors to spending; money, time and health. And although the former was no longer a constraint to him and the second less of an issue in retirement, the third was becoming the limit.
This again raises the subject of thinking about spending over time. If you are not constrained by money, you need to consider the other two limits and when you may and may not be constrained by them.
The Yorkshireman
There are however those whose spending is not constrained by either money, time or health. But whose spending is instead limited by personal habits and long standing (and unquestioned) beliefs. And occasionally, just by a simple lack of imagination.
People who don’t spend and don’t do things because they never have, or things are deemed “too expensive”. People build beliefs and then stick to them; we don’t often challenge them. And our views are more likely than not to get entrenched as we get older. It can stop people from leading the lifestyles they want to and by the time they appreciate that, those non-monetary limits are often the constraint.
And I am from Yorkshire, so allowed to say it.
Finding the Balance
There is a solution, but it’s not always a simple one. It comes with having an honest reflection about what is important to you, what matters. What do you want more of, less of in your life. What do you want your life to look like. Often it then involves a conversation with a partner and building that vision together. After that it is a question of aligning spending with that vision.
That vision of course also needs to be achievable, both personally (in terms of time, health, motivation and energy) and financially; the latter part of which good financial forecasting is crucial for.
For some, the outcome is reducing spending that doesn’t contribute towards that vision e.g. only spending on the lifestyle you want, not the one other people think you should have. For others, it can be a case of letting go of preconceptions and ingrained behaviours and learning to spend on things they haven’t before.
(1) Consumer Prices Index, CPI – 30/05/2021 – 29/05/2026. Data sourced from Financial Express Analytics.