Published Article Details

Why some wealthy people find it difficult to spend money

Posted by: Uma Shashikant on Jul 31, 2017, 06.30 AM IST

This week's story stems from my conversation with a young man seated next to me on a long flight.

The one thing that bothered him a lot was his inability to figure whether his parents were rich or poor. They were sending him abroad to study for a Master’s degree, but conversations about the spend and the scholarship had been edgy. He was worried that his parents had a psychological problem with money.

Many of us simply cannot make decisions about spending money. Saving is easily the most discussed topic in personal finance. It is easy to find research that discusses overspending and the debt trap of middle class households. Many advisers must hand-hold families to develop the saving habit and sacrifice current spending for future benefits.

But there are many households with the opposite problem. They have enough money, but will simply not spend it. Many wealthy families suffer an imposed insecurity about money. Especially if it is self-earned and if they have come from a background of being short of money while growing up. They may be wealthy today, but hold back spending fearing that they would be forced to return to being short, if they spent their wealth.

Spending is psychologically painful to many who associate money with well-being in absolute terms. My young co-passenger discussed at length about how the choice of universities tended to veer back to those that offered him partial scholarship. He was unable to persuade his parents to see that a higher ranked university that gave no scholarship would be a better choice. He was sure that they had the money to fund him, but they seemed to veer back and forth. He told me that he did not feel entitled to their wealth, and settled for a lower ranked university, but the disappointment was palpable.

His parents surely wanted to help, but could not come around to allocating the wealth they had. This problem of mixed priorities is quite common among those who are unable to make decisions about spending. How many of us have caught ourselves looking at the right-hand side of the menu, after making the choice to eat at a fine dining place? How many of us have chosen to turn back at the museum gates, after seeing the steep entrance fees, even after spending a fortune on the trip abroad? How many of us have picked up, checked the tag, and returned the garment to the stand, even if we loved the colour and the fabric?

The systematic denial of what might be legitimate spending, given the levels of income and wealth, is more common than we acknowledge. Psychologists point to a few factors that may be at play. People may mark their success and attribute it primarily to certain personal habits, attitudes and preferences. Savers who have denied themselves small pleasures to put money aside, hold up sacrifices and willful denial of pleasure as virtues.

To spend impulsively, or make decisions spontaneously is reckless in their assessment. They do better if given time to evaluate the decision and if persuaded over time. I have a friend who tells me that her husband cannot make up his mind about the anniversary gift, but she has perfected the art of advance notice and gentle persuasion to lead him to buying expensive gifts anyway. Smart woman! Those who pride themselves as hardworking and willing to put in the effort to make something happen, are known to find it tough to pay for help. A friend of mine who is an accomplished cook needlessly juggled work and home for several years, before appointing a cook. She could afford to pay for household help that would have made her life much easier, but outsourcing a task she did so well almost amounted to admitting that she did not like doing it any more. Sometimes, spending comes with guilt that we do not know how to manage.

To outsource a task we believe we can anyway do, does not make us feel happy or relieved. It instead leads to guilt that we are no longer the person who enjoyed doing that task or chore, or that we are unable to give time to what we once loved doing. Many of us end up wasting time on mundane tasks that can be outsourced easily as we see that spend as not adding to, but taking away what we imagine are the simple joys of living.

There is also a lot of virtue associated with wealthy people who do household chores by themselves. It is unthinkable that one Mr. Murthy could not engage help to clean the toilets at his home. But when it is widely known that he picks up the brush himself and that his wife cooks in their kitchen, they become role models and caricatures of how the truly wealthy behave. When they can cook and clean, so can we. Should rather than could, indeed! Many wealthy people take on frugality as an essential defining feature of their lives. My young friend wanted to know if there are known remedies to this problem of mindless hoarding as he called it.

There are three rules that seem to work well for a lot of people. First, define the spend as a percentage of the income rather than as an absolute amount. If you decide that 5% of your income will be spent on eating out, you have an overall number in your mind and are more at ease trying to fit in both fine dining and street food inside that number.

Second, allocate your wealth to current and future needs strategically. Asset allocation is not merely about deciding where to invest and for how long. It is also about how to plan the drawings. If the parents of my young friend had taken him into confidence to discuss the corpus they have and its allocation between current education expense and future retirement, our young man might be less resentful.

Third, cultivate the attitude that what you do with the wealth you have matters much more than how much you have. Many seek assets and wealth for its own sake, and find it painful to use them. The joys of spending on immersive experiences with loved ones, and the joys of giving away to those who need it even more, are bigger than the virtue of saving and hoarding.


(The author is Chairperson, Centre for Investment Education and Learning) This article appeared in Economic Times dated Jul 31, 2017, 06.30 AM IST

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