I’ve been fascinated with people’s beliefs about money for a long time, especially my own. It seems like every person’s relationship with money drives their financial behaviors. Especially recently, I’ve made an observation: most of the people I know fit into 6 categories of “money personality.” Some fit perfectly into one, while others might be a mix of two different categories. I’ve witnessed others transition from one category to another over time through education, diligence, and – in some cases – maturity. The 6 money personalities are outlined below.
1. Casual Spenders
Casual spenders do not think about money very often. They probably contribute a bit to retirement accounts. They spend the rest of what they make and trust that everything will turn out fine. They may find they must downgrade their lifestyle significantly to retire though, and this may be surprising to them.
Example: A is an accountant. She attended college at a state university and took out student loans to pay some of her living expenses. Upon attaining her first job out of school, she financed a new car at a good interest rate. She also signed up for her company’s 401(k) plan and contributes enough to get a full match. A buys clothes a couple of times a month so she looks fresh and professional at her job. She goes out with friends almost whenever they invite her, and she has a great social life. She lives in an apartment in a trendy part of town. A worked hard in school, makes a good salary, and lives her life as she pleases.
2. Super Spenders
Super Spenders are always brainstorming about what they want to buy as they make and accumulate money. They believe money buys you the best stuff. Super spenders embrace and welcome lifestyle creep. Spenders usually do not accumulate much savings unless they are very high earners or inherit money. Like casual spenders, they most likely will find they need to downgrade their lifestyle significantly to retire, and this may be surprising to them.
Example: B is a realtor who lives off commission. Whenever one of his clients has a closing, he receives direct deposits of multiple thousands of dollars. These closings are known about weeks in advance, and B spends time daydreaming about new fishing equipment and new gaming consoles he wants to buy when he receives his next check. As his success grows, he is able to trade up to nicer belongings, like a new BMW.
Speculators can’t fathom the idea of having long-term investments but are willing to make short term gambles. If their gambles pay off, they buy more stuff. Many speculators believe that eventually a gamble will pay off and they will become rich and be able to retire at that point.
Example: C is an entrepreneur at heart but works for a mid-sized company currently. He has invested in the company’s 401(k) in the past, but once the balance was sizeable, he cashed it out and invested it in a couple of stocks he believed in. Once those stocks went up a bit, he sold them and used the money for a down payment on a house. C’s plan is to save some more money to invest in the stock market soon. He also plans to start his own business soon.
4. Risk Averse
Risk averse people have a high aversion to loss. Basically, they have worked very hard for their money, and they can’t stand to lose any of it, emotionally or financially. They believe that what they have saved could disappear at any time if it is not in the safest of accounts. They do not believe in taking on risk to ensure higher returns. The risk averse implicitly accept that they lose spending power each year. As they reach retirement age, they set their lifestyle to whatever income they will have, like pensions and social security.
Example: D and E are a hard-working married couple. Growing up, their families did not have much, but they had enough to meet their needs. D and E learned extreme frugality and how to avoid waste, and they carried these lessons into adulthood. They both have middle class jobs as they build their family. They save money in savings accounts and CD’s when they can, but they know their pensions and social security will be generous compared to what their parents had. They don’t have a financial plan that they are following. They plan to work until retirement age and retire at that point.
5. Conventional Savers
Conventional savers follow traditional saving and investing advice, contributing to retirement accounts like IRAs and 401(k)s and saving for specific goals too, like weddings and vacations. Altogether, they save around 10-20% of their income and spend the rest. They believe in taking on modest risk for modest return. They are OK with retiring in their 60s and plan to keep a similar lifestyle to that of their working years when they do.
Example: F gets a union job as an electrician and later marries G, a nurse. The two have good benefits and decent wages. They know it’s important to save for retirement and other goals, but they also want to enjoy their lifestyle. They save 10% for retirement and 10% for other goals, like their first house and a new car. F and G are confident in their saving approach, and even have a financial advisor to validate that they have a high probability that their money will last if they stay the course and retire around 65.
6. Super Savers
Super savers do not believe it fits their personality or goals to have a career for multiple decades, save along the way, and retire completely at a traditional retirement age. They save a huge portion of their income (40% or more), and make investments in order to grow their money, like index funds and real estate. Super savers believe money leads to freedom and their goal is financial independence. Once they have financial independence, they will simply transition into a sort of semi-retirement, free from the necessity of traditional employment.
Example: H attended university, then went on to receive an MBA. She took on student loans to achieve her dream of attaining a master’s degree, but she plans to live frugally in order to pay them off. Once H pays off her student loans, she is very accustomed to a modest lifestyle, and decides to continue this lifestyle in order to save aggressively. She is able to purchase a home, and she gets a friend to move in to split the mortgage. H has learned how to live off half her salary, and she is able to build an investment portfolio in her 20s and 30s. She reads some personal finance books, and eventually calculates that at this rate she will be able to live off of 4% of her investments from age 40, at which point she can retire, change careers to find more fulfillment, or keep working in her current career and give more to charity while upgrading her lifestyle.