How to Spend Your Savings

It's time for Katie to liquidate her Moving Fund and head to her new place. The only problem? She fell in love:

This is not Katie.

Over the past few months, my aggressive savings has become a source of pride. I've watched the balance grow and I feel accomplished. Responsible. Safe.

But soon, I'll be back to zero. And even though that's way better than, you know, not having the cash at all, my inner Scrooge McDuck doesn't want to let go of all those pretty green bills. Ever.

Katie, I hear you. (Sidebar: I'm not stalking you. I know I blogged about your last piece, too, but that's because you have such great insight about this topic!)

People are well acquainted with the challenges of saving money, but we give short shrift to how hard it can be to appropriately use that savings. In other words, to spend it! In my Managing Cash Flow for Artists workshop (now in its sixth year), we have a whole session on operating a cushion, or Contingency Fund. This workshop is designed especially for people who have variable income and who often use credit cards for "lifestyle continuity" (also known as "eating and having a roof over your head even in months when your cash flow is negative"). Having a financial cushion is necessary for all of us, but for those who have particularly... dynamic... financial lives, being able to draw upon that Contingency Fund is a critical step toward breaking the cycle of debt. 

But my advice on the topic has more to do with the difficulty of the behaviors associated with operating a Contingency Fund than with the concrete aspects of how much to put aside, when to take it out, and how to replenish it. Because the biggest obstacle to appropriately utilizing your Contingency Fund (or in Katie's case, her Moving Fund) is emotional.

We have a tendency to fall in looooooove with our money. The harder we've worked to put it aside, the longer we've held it and the bigger the balance, the more attached we get (the same is true for investments, by the way). It is always easier to spend someone else's money (i.e., credit), which is why we override our own natural aversion to debt in order to hold on to our precious saved pennies.

So in Cash Flow, I teach Contingency Fund 101 as a behavior instead of a desired balance. And it helps to learn to walk before you run. My advice is to start with $1,000 -- a significant amount but not enough to get head-over-heels about -- and practice using it to cover expenses that are not part of your regular monthly budget or to plug holes when your income dips. The more confident you get about your ability to take out money and replace it, the less bereft and anxious you'll feel when you part with it for its intended uses. In the mental health profession, we would say you'd developed a secure attachment to your Contingency Fund. You learned that "Mommy always comes back," (or in this case, Money always comes back). Once you get the hang of properly operating that $1,000, it becomes easier to build a more robust Contingency Fund, as well as saving for other meaningful short-term goals.

Katie is doing a great job of coaching herself through the tough goodbye to her Moving Fund. In this similar article today on LearnVest, Sadia does the same with her Vacation Fund. Today is a good day for ladies rocking the Save-to-Spend technique. Yay!