Spending

'An overspending trigger is coming' when the economy opens up, financial psychologist says — here's how to prepare

"All this pressure is building up in terms of the experiences we're not having."

Share
Twenty/20

The nation's wealth grew 42% from 1920 to 1929, according to the Economic History Association. This era, known as the Roaring '20s, is marked by the popularization of jazz, over-the-top parties, and the rapid adoption of the automobile. It was also known for excessive spending. And, economists say, we are on the cusp of more '20s-type excessive spending right now.

As vaccines roll out to more Americans, the pandemic could be effectively over in a matter of months, some financial analysts say. Dr. Anthony Fauci has predicted a "return to normal" by the end of 2021.

Lots of people who've been cooped up for a year are excited to get out of their homes and pay for the privilege of being around their friends in public again, or even around strangers. "You can feel it," says Brad Klontz, a certified financial planner and financial psychology professor at Creighton University. "It's like a dam, and all this pressure is building up in terms of the experiences we're not having. And many people are suffering because of that lack of experiences."

Many Americans will have the urge to overspend once pandemic restrictions lift, and they may also have the means: At the height of the pandemic in April 2020, Americans' personal savings rate was 33.7%, according to the Federal Reserve Bank of St. Louis. In December 2020, it was 13.7%. For comparison, in December 2019, it just was 7.2%.

This is what usually happens during economically turbulent periods, Klontz says: "At the times when you feel like, as a nation, we are in a lot of financial trouble, savings rates go up. When we're feeling optimistic, when we are feeling like the crisis is over, savings rates plummet."

Odds are, if you've been steadily employed throughout the pandemic, you've been able to save a decent amount of money. Maybe you've been daydreaming about a lengthy vacation, an extravagant birthday party, or just returning to the gym and getting drinks with friends.

Regardless, it's important to remember that just because you feel like you deserve to spend wildly doesn't mean it's smart. "An overspending trigger is coming up," Klontz says, when the economy reopens. Here are some tips for keeping your post-pandemic budget under control.

Come up with the percentage you'd like to save now

Treat the economy reopening like getting a raise, Klontz suggests. You might feel tempted to indulge in a more expensive lifestyle, but doing so could result in you ending up with less money saved. Same goes for the pandemic: Don't start spending all your money and end up dipping into or depleting the savings you've worked hard to build up during this time. You still want to have a healthy emergency fund with three to six months of living expenses, or even a year to be extra safe.

To do this, Klontz suggests you "commit to a certain percentage of income you're going to be saving or investing."

For example, he says, if you're currently saving 10% of your income but anticipate more happy hours and group dinners once restaurants open back up, you might want to lower that target savings rate to 8%. This will build a concrete amount of wiggle room into your budget, and you'll still be making regular contributions to your savings.

VIDEO6:1706:17
6 lessons new retail investors say they learned the hard way

Video by Helen Zhao

Make a specific, labeled savings account

Since the recovery has been uneven, or what economists call "K-shaped," not everyone is able to save. In a K-shaped recovery, high earners and financial markets do well, even as low earners and the general economy continue to struggle. During the pandemic, this has meant that Americans who are well off have saved more than ever.

From January to May 2020, more than two-thirds of the total reduction in credit card spending came from households in the top 25% of the income ladder, according to an Opportunity Insights study. But households in the bottom 25% continued to spend just as much as they did before the pandemic.

If you're in the group of people who have been able to save, you might have started an "amorphous spending account." This is a savings account with no goals attached to it, Klontz says. If you don't visualize a reason to save, it's easier to justify using your savings randomly. "Before you know it, you're spending it in ways that don't necessarily align with your goals and values," he says.

Think about what you actually want to do when the economy reopens, and label your account with that name. "Make a European 2024 vacation account, so there's an attachment to it, something that matters," Klontz says, as an example. "Then you'd have to consciously go rob from your European vacation account, and it's a huge barrier for people to do that."

Reward yourself responsibly

All of this isn't to say you can't indulge yourself a little bit, says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors.

"I would tell people to reward themselves for a job well done for their self-quarantine," he says. "Have a little time to celebrate, but at some point you've got to get back to the fundamentals of basic finance."

Before you know it, you're spending it in ways that don't necessarily align with your goals and values.
Brad Klontz
Financial Psychologist

This advice only works if you can afford a reward, he says. If your party or restaurant budget has been diverted to other spending categories, you might not be in a position to splurge once the pandemic ends.

"Right now, if people are using excess money they would normally spend on eating out on big screen TVs, they can't then turn around and go crazy with recreational spending when the economy opens up," La Spisa says.

Be honest with yourself and remember, your "budget represents your value system," he adds. There is no guarantee that more economic turmoil isn't in the near future — after all, the Roaring '20s did slide right into the Great Depression. So if you value having an emergency fund that could help you get through another crisis, remember to prioritize that as well.

More from Grow: