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Do You Save First or Spend First?

I asked recently whether you thought a financial fast [1] was right for you. I’ve definitely come to the conclusion that it’s not for me. But as I try to work out my financial goals going forward, I’m trying to figure out exactly what is right for me long-term.

Each time I get a paycheck, should I save as much as I need to meet my goals and then spend the rest freely? Or spend what I actually need and save the rest? I thought it would be good to explore each option a little further, and figured some of our readers might be interested as well.

Option 1: Save only what you need

  • What it looks like: Figure out what you need to save [2] from each paycheck for retirement, short-term goals like upcoming travel or annual payments, and long-term goals such as a house down payment, a new car, or your kids’ college. Set aside that amount faithfully, whether it’s 25% of your paycheck or 2.5%, and spend the rest freely on all those things personal finance blogs beg you not to do: eating out, daily lattes, vacations, clothes, etc. As long as you are avoiding new debt and meeting your savings goals, just don’t worry about how you spend the rest of your money.
  • Reasons to do it: It’s fun. It’s still responsible since you’re taking care of savings first. And you can’t take your money with you when you die…so you might as well enjoy it now.
  • Reasons not to: Anything can happen [3]. Your retirement assumptions might be way off, your car might need replacing faster than anticipated, you could lose your job, you or someone in your family could face big medical bills. Basically, you can never be too safe.
  • Other things to consider: Can you ever really save enough? Worst case, your money outlasts you and you leave some to your family and friends or favorite charities.

Option 2: Spend only what you need

  • What it looks like: Give yourself a small “allowance [4]” for necessary food, shelter, transportation, personal hygiene and similar needs. Bank every other dollar, regardless of whether you have a plan for it. Budget carefully, use coupons [5] and other strategies to minimize expenses, and then sit back and watch that interest roll in.
  • Reasons to do it: Few people would argue that having more money in the bank is a bad thing. You are prepared for anything this way, and you can always use it for a major purchase down the road – even if it’s just a vacation to reward yourself for so many years of diligence! See also: “reasons not to” under Option 1 above.
  • Reasons not to: It’s hard to save with no goals in sight. Everyone deserves a treat now and then. See also: “reasons to do it” under Option 1 above.
  • Other things to consider: Is there such a thing as being too money conscious? Will it be easier to make good financial decisions on the big things if you give yourself some breathing room when it comes to the small things?

My conclusion

Right now, I’m not really following either of the strategies above – I’m neither spending nor saving as much as I could, and neither saving nor spending only what I need.

Exploring the two options above, I’m not sure either is right for me at this time in my life. I think Option 1 is probably good for people in the later stages of life, who are all-but-certain their retirement funds will last and have few if any savings goals still outstanding.

Conversely, Option 2 is good for the very young [6], those who haven’t quite developed savings goals yet, or those who can’t meet their savings goals no matter how much they try – they should at least get as close as possible.

Of course the unspoken in both of these is that getting out of debt [7] should trump spending and anything but emergency [8] savings! But if you’re on track to meet your goals, and also want to give yourself a little breathing room (like me), I think it’s ok to find your own personal balance [9] between saving and spending.

What about you? What strategy are you using as you continue on your personal finance journey?