Over on the Boglehead (Vanguard) forum, there is a thread "How is Your Relationship with Money?" (link). The originator of the thread writes about how he was risk adverse staying mostly in cash, and unwilling to spend much. A lot of folks raised during hard times get similar habits.
A person's early childhood memories of money, the way their parents spent and saved, the messages a person got early in life make a strong imprint. Suzy Orman talks about this, and her first memory is her picking up a coin from the ground and her parent telling her to drop it, "it is dirty." So the message that imprinted was that money is dirty. It is easy to see how a person might develop unhealthy money habits when that is the message. (And Ms. Orman did, despite her recent successes, there was a lot of up and down in her financials.)
There is no right or wrong answer, but a healthy balanced approach to saving and spending, the middle road, is what I advocate. A miserly extreme isn't healthy, nor is the spend it now, buy everything on credit approach. I can tell stories on both extremes. I know a guy that was a millionaire many times over, but balked at paying $60 for new shoes. I know a person that was already deep in debt, and then decided to move to a bigger more expensive place to live and take on even more debt.
A young relative recently landed a very good job, good pay, good benefits, good job security. I suggested that saving 50% of income would be a good way to go. The person was thinking more in terms of 10% or 20%. 50% may sound ridiculously high to many, but considering the income and living expenses, it would still leave a good bit of money for luxuries, such as meals out, vacations, gadgets. Here's an optimistic way to think about it, if a young person can save 50%, and earn 10% on their investments, they could in theory retire with their current lifestyle after 10 years of working! A round number example: a person earns $100k, saves $50k per year, lives on $50k. After 10 years they have saved $500k and if earning 10%, they are now making $50k per year on their nest egg.
Yes, those numbers are quite optimistic in this age of low returns, and don't figure in taxes. 4% tends to be bandied about as the safe withdrawal rate from a big nest egg, but it wasn't always that low a number. The safe number is more like 2.5% for a young person looking to live another 80 or 100 years in good health. 3% is a traditional round number that many big endowments have used for 100 years. The other issue is that the young person may start a family and have much higher living expenses and responsibilities in a few years. Still, that nest egg would be nice to have in that event as well.
Another point is that in this economy, very few people are at a place where they can save half their income. I am dismayed to know that half the U.S. population doesn't save at all. Yes, there are some that can not save because of circumstances, but it isn't any where near half the population. Many that choose to spend buy gadgets or gifts, or take trips, or buy luxury food items.
Enough of the soap box talk against the spending culture. If you are reading this, you are likely one of the savers, the investors. Again, a balanced approach, a healthy relationship with money is the best place to be, and there is no right or wrong answer. Early childhood money memories, early investments experiences can imprint on a person. Be conscious about all of this. For would-be novice traders, I emphasize the psyche half of the equation. Each person is wired a bit different. So identifying what works for you, can be the biggest piece of the puzzle.
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