The Frugal Balance: Staying Away from Financial Extremes

by Nora Dunn on 28 September 2007 3 comments
Photo: Steph Carter

One of the most underrated financial x-factors in our lives is our relationship with money and the inner psychology of how we deal with our finances. I suspect that it is because it is the most difficult and intangible aspect of money management, and also the hardest to fix.

In my financial planning career, I saw a lot of different people with a myriad of financial backgrounds and attitudes towards money. For example, I'd like to share the story of a fellow who I shall nickname "The Monk With A Big Screen TV" (we'll call him Monk for short!):

Monk allowed money to flow right through his hands for most of his life, regardless of his income. In his early 20s he had a job for a few years in which he made over six-figures. It disappeared just as quickly as the years when he made under $30,000, and he had very little to show for either of those situations at the end of the day.

Finally he realized he was in financial trouble when collectors agents were banging down his door, he broke up with his girlfriend, and didn't even have enough cash to find a place to stay for the night. Despite the fact that he had a job, he actually became homeless for a few days until he could scrape enough together to start getting his life on track.

This was a real wake up call for Monk, but sometimes wake-up calls aren't enough.

Monk decided that the best way to get ahead would be to live like a monk and punish himself for getting into this financial squalor. He endured weeks not spending any more money than what he absolutely had to for survival. He ate poorly if at all, cancelled all his services (eg: phone, cable, internet, even heat at one point), and refused to spend money on anything. He even cut himself off from his friends and any social contact. His justification was that if he endured this period of sacrifice, he would be able to start to financially get ahead, and eventually breathe a little easier. He honestly didn't see moderation as a possibility - it had to be all or nothing.

Of course, subjecting yourself to such mental, physical, and emotional torture can't last long before the pendulum swings, and Monk was no exception. One month after his vigilant overly-frugal stint, he broke down, bought a big screen tv, a case of beer, and re-ordered his cable service.

Of course Monk soon realized that all his hard work and sacrifice in the previous month was negated by this splurge, and consequently felt guilty. So, back to the monk-lifestyle he went. Until he broke down again.

Poor Monk went through this vicious financial circle for years before he realized that he didn't have to live a life of extremes, effectively getting him nowhere. He hadn't made a dime of progress on his debts, and if anything his affairs were worse.

I had another client (a couple, actually), whose own personalities defined financial extremes. We'll call them Yin and Yang.

Yin never had much money. She (like Monk), spent money like it was water. She could justify a fancy dinner at an expensive restaurant just because it was the second Tuesday of the month. She cashed in retirement savings for vacations. She played a balancing game of maxed credit cards, only paying off enough to charge the next big extravagance. And of course, she had no investments to speak of. She justified every expenditure by saying that she didn't like her job, had very few things in life she truly enjoyed, and if she couldn’t treat herself once in a while then what was the point of even being alive.

Yang, on the other hand, had quite a different view. A big night out on the town for him was renting a few movies at the local video store. He dreamed of travel, but never (in my years of knowing him) would he ever actually go anywhere, because he was forever convinced that there wasn't enough money for his future. He saved and squeezed every single penny he had, and brought new meaning to the word frugal. He even cut his teenage son off his allowance ($7/week for doing the chores) saying he couldn't afford it. He was also a workaholic, driven by the constant fear of not having enough money for the future or in the event of an emergency.

I'm sure it comes as no surprise that in addition to receiving financial counselling from me, Yin and Yang also received divorce counselling and are now learning their financial lessons separately.

But who was right? Yin who refused to plan for tomorrow in her desire to live for today?

ARTICLE CONTINUES BELOW

Or Yang who refused to live for today in favour of planning for tomorrow?

How about Monk? Which was better? His monk-like lifestyle of sacrifice, or his extravagant splurges that brought him back to square one?

In a way, everybody was right. And wrong.

I was unable to continue to work with Yin and Yang as circumstance had it, but I continued to keep in touch with them.

Over the years, Yin's financial situation only worsened, and she also became quite ill. She had no money to deal with the illness, but some benevolent friends stepped in to help her in a time of need, which she was extremely lucky to have. What I can credit Yin for was her zest for life. If she dropped dead tomorrow, one could argue that she lived a full life with few regrets. Unfortunately, she will never ever be able to retire (or even slow down a bit as she ages), and will continue to be an increasing financial burden on her family and friends.

Yang, on the other hand, continued to save frantically for years. One day, to my surprise, he declared that he had reached his financial goals, and he could start to relax. He was scaling down his business, and would be fully retired by age 70 (which was surprising as I figured he would work forever out of financial fear). He was starting to enjoy life more, and treating himself once in a while. Unfortunately, his relationship with his (now adult) son only continued to deteriorate as he grew up, and they are relatively estranged today. From what I'm told when they do occasionally meet, it is strained, and of course Yang never pays. To bring the comparison full circle, if Yang dropped dead tomorrow, one could argue that he spent so much of his life planning for tomorrow that he never really lived.

Monk and I did continue to work together over a number of years, and his transformation embodied much of what Yin and Yang never really learned. He discovered that his pattern of vigilance and splurges was getting him nowhere, and in fact as time was passing him by his financial situation was getting worse, compounded by the fact that he wasn't able to invest any money for his future and allow it to grow.

Through debt management strategies and simultaneously squirreling an (initially) small amount away for the future and a safety net, he slowly but surely took hold of his finances. It was a long slow process, and he'll admit he had to learn his lessons many times over before he really redefined his relationship with money. Today he says he controls his finances, not the other way around.

If there is anything that Monk (and Yin or Yang for that matter) can teach us, it is that living a life of extremes is not constructive. If we can manage to keep our eyes on the future, but also manage to let loose a little today, then we can really start to enjoy what life has to offer.

And of course, it's easier said than done.

 

 

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Seems like the lesson of this story is that you should estimate your own discount rate early on and stick to it.

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Mat Pancha

I see a lot of myself in "the Monk". I went through similar experiences, with the addition of the credit card onslaught when I started University. I had my dozen or so credit cards I got after falling for the "free shirt" trick on the first day of University. That followed by a string of high paying jobs, and feeling like I was on top of the world, but never setting aside money. And to top it off, losing a small fortune on stocks. I learned my lesson when I found myself sleeping on a friend's couch, with all my belongings either trashed or standing in one small corner of his living room.

Now I budget like I should have before, its been a few years, but I have a small nest egg, have money invested, even have my son's college fund going. At current rates, my son won't have to worry about tuition his first year, and he isn't even a year old yet.

Nora Dunn's picture

Congratulations, Mat!

What a feeling of accomplishment, huh? Too bad the recovery almost always involves hitting "rock bottom" first.