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Let Them Eat Cake

Avoiding extremes in almost all aspects of life is usually a good thing. In finance, when extremes
develop in stock prices either to the high or low end, the price will move back toward the average over
time in what is known as mean reversion. Similarly, in physics, Newton’s Third Law states that for every action in nature there is an equal and opposite reaction. Or in other words, if object A exerts a force on object B, then object B will exert an equal force back on Object A to neutralize the force – cancelling the extreme. 


As financial planners we have the opportunity to see all sorts of extremes when it comes to people’s finances. Very often extremes are described as they relate to spending too much or not saving enough. This behavior is more noticeable than say the other side of the extreme – not spending enough or saving too much. As many have come to learn in working with us, financial planning can be a liberating process because it sets boundaries to help one achieve their ideal financial life; striking a balance of saving enough to protect the future but allowing enough now to be enjoyed. 


The over-saving and under-spending phenomenon is usually born out of a fear of not having enough in the future to spend on needs and wants. What we witness is an overcorrection that often results in someone not feeling comfortable to spend at all and the need to save everything. The thing we all need to keep in mind is that tomorrow is not guaranteed. As children and young adults many of us succumb to the “superman syndrome” believing we are invincible and will live forever. As we age we know we are not invincible nor will we live forever but believe we will almost live forever. There is nothing more tragic than watching someone over prepare for the future that never comes. 


If you identify as one of those that over saves and never feels comfortable enough to spend, to enjoy life, then perhaps reexamining your financial plan or developing one in the first place is in order. If you’re on the other side that extreme (spending too much or not saving enough) then perhaps reexamining your financial plan or developing one in the first place is in order. The key to a successful financial plan, as is the most things in life, is moderation. If we were all to heed this advice then perhaps we really can have our cake and eat it too.