Tightwads and Spendthrifts!

Happy New Year!  We hope the year is off to a great start for you and yours.

At Pauley Financial, we have kicked off the new year with a valuable addition to our team. We are honored to welcome Brian Cox to our firm as we continue to challenge ourselves to provide better service to our readers and clients. Doug first met Brian over 10 years ago. A brief bio of Brian follows:

Brian received his Bachelor of Science (Economics) degree from the United States Military Academy (USMA) at West Point in 1995. Following graduation, he completed Airborne, Air Assault, and Ranger training, and served as an artillery officer. At the completion of his active service, Brian volunteered for Reserve Officer duties, and was later called back to serve in Baghdad as a member of the Special Staff for the Commanding General of the Multi-National Forces - Iraq.

After earning his MBA from the University of Michigan in 2003, Brian followed his lifelong passion for investing by joining the JPMorgan Private Bank as an Investment Associate in New York. He has taken on positions of increasing responsibility in the asset management industry, most recently as a Principal of WestSpring Advisors, LP. He has managed institutional and high net worth client relationships globally, and his background and experience in both traditional and alternative asset classes appropriately complement Pauley Financial. He has served as a panelist and industry awards judge for various institutional industry groups and publications.

Brian is married with three sons. He enjoys triathlons and volunteering - as a youth coach, as a Service Director for the Wounded Warrior Mentorship programs, and as an active member of his church. Brian and his family now reside in New Braunfels, Texas.

Moving onto our topic - "Tightwads and Spendthrifts - Unite"! I'm sure none of you reading this article could relate, however, in the event that you may know someone that shares these characteristics, perhaps they might find this article of interest. We have adapted this newsletter from a Kiplinger article published in February 2012 authored by Bob Frick.

Consider the results of brain scans performed on people while they made buying decisions… Researchers found that when subjects were shown products and then prices, about 30% of them experienced a fired-up insula. The insula is the part of the brain that's active "when we're getting socially excluded or somebody's unfair to us or we have to smell something gross," says Scott Rick, a professor of marketing at the University of Michigan and one of the researchers. The study also found that about half of subjects had a more measured response when contemplating a purchase, and 20% seemed to feel pleasure and little pain.

That study was the genesis of a scale that measures how likely you are to be a tightwad or a spendthrift. Spendthrifts don't feel enough pain for their own good, so they overspend, carry more debt and feel guilty later. Tightwads, however, experience too much pain, which leads to feelings of regret for not having spent enough. Rick says it's worse to be a spendthrift because of the financial costs, but neither extreme is as good as the middle group, labeled unconflicted. "Spendthrifts are bad off financially and psychologically," he says. "Tightwads have big bank accounts, but we find that they're less happy than the unconflicted group."

Where Do You Stand?

You don't need a brain scan to figure out where you land on the scale; a simple survey will do. In a 2008 paper, "Tightwads and Spendthrifts," Rick, George Loewenstein, of Carnegie Mellon University, and Cynthia Cryder, now with Washington University, surveyed more than 13,000 adults. They found that spendthrifts were three times as likely as tightwads to be in debt, regardless of income. (Take the survey yourself: Are You a Tightwad or a Spendthrift?)

Fatal Fiscal Attraction

Rick and two colleagues, Deborah Small, of the University of Pennsylvania, and Eli Finkel, of Northwestern University, applied their scale to a study of married couples, "Fatal (Fiscal) Attraction: Spendthrifts and Tightwads in Marriage." Researchers found that tightwads and spendthrifts regret their spending habits and often marry spending opposites to compensate. Such a marriage starts out well, says Rick. The spouses "help each other meet in the middle." When dining out, for example, "they don't spend a million dollars on a great meal, but they don't go Dumpster-diving either."

Tensions rise with purchases that really matter, such as cars and houses, says Rick, a self-described spendthrift. Such marriages "might be refreshing at first, but my own guess is that they then become maddening" as couples begin to bicker over spending issues. The study suggests that spendthrifts who marry tightwads, as you might expect, tend to be better off financially than spendthrifts who marry spendthrifts. But spendthrifts who marry spendthrifts tend to have a happier relationship, even though their financial situation is often worse. When two tightwads marry, they enjoy both better finances and a more satisfying relationship.

Balance Your Spending

To help rein in spendthrift tendencies, you can focus on the opportunity costs of buying more than you need. For example, when buying a car, instead of spending $3,000 on the luxury-options package, think how that money could be put to better use.

Tightwads can frame some outlays as investments -- think of a vacation as an investment in productivity, Rick suggests. They can also buy with plastic because it's less painful than paying with cash.

As we said tongue-in-cheek as we introduced this topic, we are certain that you and yours fall nicely into the 'unconflicted' category! In the event, however, that you may be able to relate to either of these personality types, or know someone that does, know that we continually work to help our clients find the right balance of living for today and saving for tomorrow. The trick is finding and tweaking the balance that works for you.