Unusual thoughts on saving

September 22, 2017

Careful observers of this newsletter will note that I don't comment frequently on savings. It's true, and it's largely because I see savings and spending choices as deeply personal decisions. One person's actions in this area won't resemble another's; there are myriad factors people weigh, both consciously and unconsciously.

The opposite of savings is consumption. Someone skilled in saving once pointed out to me that in medicine, "consumption" was a "wasting of the body by disease," and was formerly used to reference a type of tuberculosis. By the time he had reduced a purchase at Starbucks to lung disease, I was too depressed to continue. I probably went out and bought a mocha latte to cheer up.

I don't want to reiterate what you can find on hundreds of financial sites regarding savings tips and strategies. But let me try to add a few points that are not as common but might excite a few neurons.

1. Your savings and your investment model are inherently related. For example, if you have long term investment performance at 3% returns, spending today doesn't "cost" you what it would in the future if your performance were at 8%. If you have a higher return model, your current savings is that much more valuable, because you're going to garner more on the capital you save.

This was one of the driving arguments behind Warren Buffett not giving his money away until late in life. His thesis was that if he was a significantly better investor than average, which turned out to be true, it was societally beneficial that he keep doing the investing as long as he could, compounding money in a way few others could match, and then give away a larger sum later.

2. Keep in mind that you can save in a general, taxable brokerage account. Often I talk to people and the idea in their mind is that savings is only done in retirement accounts. It can be done in both. A taxable account has its eponymous disadvantage of course, in that you have to pay taxes on recognized gains and interest and dividends.

3. I encounter people who are annoyed that they are saving so much while they perceive others in society to be spending at high rates, only to complain later that they need government programs for support. This perception may or may not be true. But something to keep in mind: it's good to be a saver / investor in a consumer economy. If there is too much saving, the economy cannot grow. If everyone produced just work and savings, there would be no one on the other side of the transaction to consume it.

4. Your money and your utility are not the same thing. Utility in economics is the usefulness, sometimes referred to as happiness, you get from a good you own. You might raise your personal utility by buying a thing or an experience. However, you may well sacrifice future utility on a much larger scale as well. That balance is something to think about.

There is research that anticipation of buying releases short-term endorphins. Actually, it is unpredictable anticipation that has the largest effect. Psychology Today has a nice write-up.¹ Here's a technique I practice (note practice, not master) on a personal level. The ancient stoics realized that a solution to this problem was to want what you already have, and institute a psychological break on the constant treadmill for "more." This is now referred to as Negative Visualization. Here is a good article on the topic if you want to learn more. ²

Dan Cunningham

1. https://www.psychologytoday.com/blog/brain-wise/201510/shopping-dopamine-and-anticipation
2. https://howtobeastoic.wordpress.com/2015/03/26/irvine-on-negative-visualization/