Discretionary Spending - Can It be Irrational?

[Culture]

My brother and I were having a discussion last week about family finances and had a major difference of opinion about discretionary spending. His position was

1) How you spend discretionary income does not negatively affect your or your families present or future stability so
2) No matter how you spend the money it is equally reasonable/rational.

I sympathize with this, as I have long realized that how you spend your discretionary income make no sense to most people. However, this does not mean all spending is eqaully rational. To wit:

1) Person A likes to collect gold coins issued by government mints. They spend all discretionary income on this hobby. While gold goes up, and gold goes down, it is likely to come close to preserving (or perhaps even exceed) its NPV over long period of time.
2) Person B likes to purchase trendy, high end designer clothing. They spend all discretionary income on this hobby. Its value after six months is 10% of the sales price and it is given to goodwill after 1 year.

Are these equally rational? My brother's position it that if both derive similar satisfaction from their spending, it is. Whatever gives you enjoyment in life. However, you cannot argue that at the end of the day, B is better off than A. Or can you?

I am not saying person B is doing anything wrong, or bad, or unethical. Just less rational than other choices.

Keep in mind, we are discussing the position where both A and B have already fully funded their present and future "fundamental" obligations. The kids college fund is full, the house is payed off, retirement is funded, etc.

What do you think?

 

[REWahoo]

What do you think?

I think you and your brother should talk about football rather than financial matters.

 

[Culture]

I think you and your brother should talk about football rather than financial matters.

After about thirty minutes of this my son made that decision for us.

 

[Lusitan]

Are these equally rational? My brother's position it that if both derive similar satisfaction from their spending, it is. Whatever gives you enjoyment in life.

Well I think that's the answer right there. If you've already funded all of your obligations, and they have rationally included everything necessary (living expenses, healthcare, retirement, college funding, and anything else that you deem important and necessary) and you're left with "fun money" that you decide to spend on things that make you happy, the most rational thing to do is just that -- spend the fun money on whatever makes you happy.

Whether it's coin collecting or designer clothes, they would both be equally rational in that scenario.

That said, it's purely an academic question. Reality is never as clear-cut as that example. You can never be 100% certain that your future obligations will be funded adequately, and so it would be more rational to favor "fun stuff" that preserves some value (e.g. coin collecting) over things that don't (e.g. designer clothes).

 

[Culture]

That said, it's purely an academic question. Reality is never as clear-cut as that example. You can never be 100% certain that your future obligations will be funded adequately, and so it would be more rational to favor "fun stuff" that preserves some value (e.g. coin collecting) over things that don't (e.g. designer clothes).

That really the core of my position. A more fiscally sound approach to spending discretionary income has to be better, as a strong financial position is always going to weather future uncertainties better than a weaker one.

That said, I blow plenty of discretionary income myself. In fact, the discussion occurred on a "boys" vacation where we blew plenty of cash. However, I try to limit this, where my brother does less so.

I do realize that you can get carried away with this approach and die at 95 with mayonnaise jars stuffed full of 100 dollar bills.

 

[tryan]

If discretionary spending is about satisfaction/utility then your brother is right (both are happy/satisfied).

If it's about something else. You're right (but it's probably not discretionary spending).

 

[Animorph]

Maybe fashion is not a great example for this forum, but try travel instead.

Is it more rational to collect gold coins with a good prospect of future value, or is it more rational to travel (where the money essentially disappears completely)?

With today's common sensibilities, that kind of makes the gold collecgtor look like Scrooge and the traveller look like a fun person. On the other hand, my Dad died of Alzheimers and in the end all those travel memories were lost to him. Does that change the balance?

We try to maximize our pleasure with discretionary money, which may or may not include saving some gold for the kids.

 

[JOHNNIE36]

This goes on with DW and myself all the time. We have no debt and operate on a very "sensible" budget. Actually, we have no budget. Ours amounts to "receive bills-pay bills". That's it. We each get our "spending money" weekly but that is just walking around money. All large purchases are by credit card, which falls into our budget of "receive bills-pay bills". She has her "wants" like sewing equipment, material, purses, clothes and decorating stuff for the house. My wants are golf stuff, however I haggle over a new golf bag and it has to be on sale, or a new club that I'm still waiting to go on sale. She would have bought it in a heart beat and the hell with the sale. It's just in my makeup. Still, I think most of her purchases are "foolish" or "stupid" or "needless". But, I'll think nothing of spending $50 three times a week to join my buddies in a golf game. Got to thinking about the posts on this subject and it has changed my position relative to how I think about her purchases. It's what ever makes you happy!! And now I'm happy.

 

[Culture]

If discretionary spending is about satisfaction/utility then your brother is right (both are happy/satisfied).

My brother likes the word "utility." He used it a lot in supporting his position .

 

[Culture]

Maybe fashion is not a great example for this forum, but try travel instead.

Is it more rational to collect gold coins with a good prospect of future value, or is it more rational to travel (where the money essentially disappears completely)?

With today's common sensibilities, that kind of makes the gold collecgtor look like Scrooge and the traveller look like a fun person. On the other hand, my Dad died of Alzheimers and in the end all those travel memories were lost to him. Does that change the balance?

We try to maximize our pleasure with discretionary money, which may or may not include saving some gold for the kids.

No doubt that balancing the two extreme positions is the key to true lifetime happiness. I am a sucker for travel myself, and, as you note, the money is gone when you get back.

 

[Culture]

Still, I think most of her purchases are "foolish" or "stupid" or "needless". But, I'll think nothing of spending $50 three times a week to join my buddies in a golf game. Got to thinking about the posts on this subject and it has changed my position relative to how I think about her purchases. It's what ever makes you happy!! And now I'm happy.

I realized that most peoples hobbies make no financial sense to others outside of the group that participates, i.e.

Collecting anything
Golf
Audiophiles ($10,000 speakers!)
Hunting (even eaten a $200/pound elk sausage?)
Gardening (ever grown a $100 watermelon? I have.)
Etc

 

[ziggy29]

Being a coin collector, I know it's easier for me to justify spending discretionary income on my hobby because (a) I never spend anything above and beyond extra cash flow we have each month AFTER all savings and investment goals are met, and (b) I have a reasonable expectation that much of my original "investment" (or more sometimes) will likely be recouped if we needed to sell it. No guarantees, of course, but if I ever quit my hobby I know I'd get back a lot of of what I spent on it than someone whose hobby primarily results in spending on consumables.

Having said that, if someone can easily afford it (meaning all bills are paid and all savings, investment and debt reduction goals are met first), if it enhances their enjoyment of life, so be it. We have no guarantee we'll be around for the tomorrow we're saving for, so we should try to enjoy today as well.

 

[Bestwifeever]

Is it not still true that you can't take it with you?

 

[W2R]

I think discretionary spending should be whatever you want it to be - - at your discretion. That is why it is called discretionary, IMO.

Some examples of perfectly valid discretionary spending, that I think are OK if they fit into your budget and financial plan and if you really want to spend your money this way, are

(1) travel
(2) ordering a well done steak in a restaurant even though most people think medium rare is better and even though you *could* grill an equally good steak at home and save the money
(3) A "Vote for John Doe" type of t-shirt, even though you won't want to wear it after the elections.
(4) A lavender Ironman watch just because you think it looks cool, even though you have two other perfectly good watches that you could wear, or you could just look at your cell phone instead
(5) Paying for someone to mow your lawn, and then paying gym fees so that you still get some exercise even though you don't mow any more.

Notice that none of these are going to help your net worth in the slightest. I have spent discretionary money on (1), (2), (4), and (5) above and didn't feel even slightly guilty about it. Haven't yet bought a political t-shirt, though!

 

[Culture]

(5) Paying for someone to mow your lawn, and then paying gym fees so that you still get some exercise even though you don't mow any more.

Is this kind of like ordering a big mac and diet coke ?

 

[FIREd]

For me, discretionary money should be spent on things that make you happy. If it's fashion, great! If it's collecting gold coins, great! If it's travel, great! Gold coins might retain their value but travel might provide experiences and memories that will last a lifetime and that could be, ultimately, more valuable to someone than having a few gold coins collecting dust in a safe. I think it depends on people's personality.

 

[W2R]

Is this kind of like ordering a big mac and diet coke ?

Hey, balance in all things, right?

 

[ziggy29]

Is this kind of like ordering a big mac and diet coke ?

No, it means paying to de able to all of your exercise in an air-conditioned gym while you let other people mow your yard for several months out of the year when it's 95+ and humid outside.

 

[youbet]

With today's common sensibilities, that kind of makes the gold collecgtor look like Scrooge and the traveller look like a fun person. On the other hand, my Dad died of Alzheimers and in the end all those travel memories were lost to him. Does that change the balance?

No, Alzheimers/death would have the same impact on either travel or gold. Neither travel or gold would have any utility to the owner. (As far as I know..... I actually have'nt died yet, at least not that I can remember.)

 

[Nords]

My brother likes the word "utility." He used it a lot in supporting his position .

I think your differences arise from your definitions of words like "rational" and "utility". You'd probably also have trouble finding a panel of moderators willing to stay in the same room while you concluded your discussion, but that's a separate issue.

"Discretionary spending" brings you value from whatever you're flinging your money at. It's not supposed to bring value to someone else unless they happen to share your values. "Value" could be put in units of "How many hours am I willing to work for this?" or "How many more months will this delay my FIRE?" If the answers still support the flinging then the activity has value.

Armed with this perspective, you could go back to your brother with that other ER koan: "Should I pay off my mortgage or invest the savings?"

 

[Sarah in SC]

What a great topic of discussion with your brother, culture. I have to say that I only wish I could have these types of discussions with the situation you've described.

I agree that beyond the basics, discretionary spending is just that, discretionary. Doesn't have to be justified to anyone else. There is no rational reason in the world for me to have 6 dogs and 6 cats, but that is just one of the things that I spend money on.

 

[NW-Bound]

I think discretionary spending should be whatever you want it to be - - at your discretion. That is why it is called discretionary, IMO.

Some examples of perfectly valid discretionary spending, that I think are OK if they fit into your budget and financial plan and if you really want to spend your money this way, are

(1) travel
(2) ordering a well done steak in a restaurant even though most people think medium rare is better and even though you *could* grill an equally good steak at home and save the money
(3) A "Vote for John Doe" type of t-shirt, even though you won't want to wear it after the elections.
(4) A lavender Ironman watch just because you think it looks cool, even though you have two other perfectly good watches that you could wear, or you could just look at your cell phone instead
(5) Paying for someone to mow your lawn, and then paying gym fees so that you still get some exercise even though you don't mow any more.

Notice that none of these are going to help your net worth in the slightest. I have spent discretionary money on (1), (2), (4), and (5) above and didn't feel even slightly guilty about it. Haven't yet bought a political t-shirt, though!

I see no RV on your list.

I once said to an older colleague, "They say people on their deathbed never regret that they did not spend more time at work. I want to be sure that I would not regret not seeing places in the world that I wanted to see".

He shook his head. "No, people on their deathbed only wish the pain to stop".

It left me speechless.

Soo.... Spend your money, or don't spend it... In the end, it matters little. But, but, but, I still do not want to spend my last days under a bridge.

 

[travelover]

This gets really interesting in a divorce. She gets half your gold coins and you get half her shoe collection. Or not.

 

[W2R]

No, it means paying to de able to all of your exercise in an air-conditioned gym while you let other people mow your yard for several months out of the year when it's 95+ and humid outside.

That's for sure! I quit mowing when I was about 56 because the heat was affecting me more than it did when I was younger. Also, so many men have heart attacks doing stuff like mowing in New Orleans in August, when they are sedentary and older. Even though I am a woman I was thinking it might be a good idea to quit mowing. Besides, the gym is more fun!

 

[W2R]

I see no RV on your list.

No, there will be no RV for me! And the travel I have done was mostly driving up to southern Missouri where I plan to retire, or flying to Oregon to see my daughter. That's about it for me.