The Present Versus The Future

Not long ago, I was thinking about the financial lessons that some of my friends learned during their formative years from their parents.

One close friend of mine, who I’ll call Hannah, had parents that were regularly in disturbing amounts of debt. In the mid-1990s, they managed to convince some lender to build them a house that cost almost $160,000, when their combined incomes could not possibly have exceeded $40,000. They sold their older house (a rather nice one) to do this. Shortly after Hannah left for college, the house of cards collapsed and the bank foreclosed on the house, leaving them with nothing.

Another friend of mine lived with his father who liked to party with reckless abandon. He didn’t have debt, but he also didn’t have a regular job and no plan for the future. Quite often, I’d stop by to say hello and his father would be passed out on the living room floor. He would do odd jobs for a few weeks, then quit to go on a bender, then repeat the cycle.

What tied these two together? In both cases, the parent placed far more value in the present than in the future and thus completely disregarded what the future would hold.

The truth is that this very bias towards the present instead of the future is the cause of personal finance problems. Instead of waiting for the future to buy an item, we can use credit to get it in the present and let our future self pay the bill, right? Credit, at its’ very essence, is merely giving you a piece of pie today in exchange for a bigger piece of pie tomorrow.

In my eyes, every good personal finance decision places more value in tomorrow than today. Think about the good personal finance choices you can make: investing, paying cash for an item instead of using credit, and so on. All of them involve you not spending money today so that you can spend it tomorrow.

On the other hand, every bad personal finance decision places more value in today than tomrrow. Every time you buy something using credit, you’re paying far more for it than you would if you just saved up the money; you’re choosing to have the item today in exchange for paying substantially more than the sticker price for it tomorrow.

In the past, I’ve talked about a “switch” flipping in my head that made me finally get personal finance – it coincided with the birth of my son. That “switch” was a change in me from valuing today much more than tomorrow to valuing tomorrow at least as much as today. Why did it happen? I knew that my child’s tomorrow was completely in my hands as he was not capable of coming up with a solution if everything fell apart. When I realized that, the future went up in value and the present went down in value.

What’s the message here? Every time you make a decision about money, the one that benefits the future is usually the right one. Spending money benefits the present, while saving it benefits the future. Whenever you hear about someone drowning in debt, it’s someone that has valued the present more than the future and they’ve finally reached that future … and found that they’ve sacrificed it.

How does one focus on the future? For each person, it’s something different, something that opens their eyes and really makes them see that every time they spend money wastefully now, they downgrade their future. Some people are raised by people with that vision already – others usually have to go through a maturing or a major life-altering event to change perspective. It’s a beautiful challenge.

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  1. Rob in Madrid says:

    It’s also called poor impulse control (hat tip to Daniel Goleman for that one) and it has been at the heart of 22 years of disaterious financial decisions for my wife and I. While time and alot of financial pain have dulled it hasn’t completely gone away. For us hearing about that was a real “Aha” moment, finally some understanding on why we kept repeating the same mistakes. Well we haven’t conquered it completely it has allowed us to avoid budget busting decisions.

    Poor impulse control is most often associated with drug and alcohol abuse.

  2. Bill says:

    One professor (Princeton?) argued years ago that the difference in lower class versus upper class was largely a difference of time horizon, not money.

    Even people with great wealth can squander what they’re given by focusing on the present (e.g. Paris Hilton)

  3. !wanda says:

    It’s only in recent history that it’s been possible to save for the future. Before civilization- the vast majority of human history- most goods would spoil quickly, and anyway you couldn’t own much more than your family could haul on their backs. Even after civilization, regular folks did not have access to institutions that would responsibly guard their money. Even if they had, the history of most nations consists of a series of war and drought and unrest. Why save money if some new government replaces the currency and kills all the bankers? Why save money if bandits will just come along and steal it? It’s only in the past few hundred years in developed countries where the poor and middle class were able to put saved money anywhere besides the mattress and where the world has been peaceful enough to believe in a stable enough future to save for.
    There’s some report out now that analyzes the spending habits of the world’s poor. People who subsist on less than a dollar a day still somehow manage to buy alcohol, tobacco, sugar, and stuff for religious festivals. Maybe you’d chide them for their bad decisions, but what else would they do with a little extra money? Banks don’t serve these people, and having a little money saved would make them targets of criminals and greedy friends and relatives. It’s not impossible, but it’s very, very difficult.
    Anyway, there’s a reason why saving for the future, instead of spending money today, is hard. It’s a fight against the lessons of tens of thousands of years of human existence (and billions of years of animal evolution, but there are people who comment here who don’t believe in that). Fortunately, people have also been exercising logic and restraint for those tens of thousands of years, and we can use these traits to fight against impulses to live for today instead of tomorrow.

  4. Wanda says:

    It’s good to plan for the future, but it’s important that you don’t completely neglect today (not saying that you advocate that, Trent). “Every good financial decision is based on the future” – I think that’s generally, but not always, true. The financial decision to take a around-the-world trip is probably very much based in the present – and it can be a great decision. Sure, you’ll have the memories in the future, but what you’re spending money (and time on) is the experiences you’ll have along the way.

  5. Xtine says:

    The second scenario rings a bell. My uncle is a lot like that, but fortunately for his wife and kids, still (all things considered) responsible with his benders. He knows they’re coming, and budgets for them. He will also work at least two FT jobs and a PT one while working.

    …He’s bipolar, and untreated. It’s not the most desireable setup, but it’s also not the worst. And it does go hand-in-hand with poor impulse control – the hallmark of manic episodes.

  6. S. B. says:

    I’ve often heard that the ability to delay gratification as a child is a good predictor of future academic and financial success. I don’t have a source on that, so I can’t vouch for the authenticity of those sorts of claims, but it does seem logical that it’s likely to be true.

    Supposedly there have been studies on this idea. One of your readers may know more about that…

  7. Steve says:

    I think that deferral of current desire is a good trait, but I’m sure like some other frugal people I occasionally go too far the other way. Sometimes I think I defer too much in my effort to save money, live frugally, etc. The real challenge is finding a balance between enjoying your life in the moment and preparing yourself for a (relatively) worry-free financial future.

  8. Humberto says:

    One book that speaks about this is called “Don’t Eat The Marshmallow…Yet!” by Joachim de Posada and Ellen Singer. Maybe Trent can provide us with one of his great reviews about this book.

  9. Mark Shead says:

    There has been some research into the phenomena known as time discounting. On average, people value $68 today the same as $100 in 12 months.

    For more info see:
    http://www.productivity501.com/time-discounting/87/

  10. Rob says:

    I had a conversation with someone about this recently, doesn’t anyone remember the story about the ant and the grasshopper anymore? Or do they remember, but think that the government will bail out the grasshopper?

  11. tabletoo says:

    I am a baby boomer and went to grade school in Washington DC. In kindergarten and first and secon grade we regularly had aid raid drills. Then we moved to upstate New York and our school had bomb shelter drills. We learned about the atom bomb and we were basically taught that the world was going to end before we grew old. Also from what I learned it seemed that the world was getting so messed up ecologically (except that was before the use of the word ecology) that it would be wrong to bring more people into the world, it was considered irresponsible to have children. I’m not saying this was the message from my parents, just that this was the overall message I got.

    My wake up call was in my late thirties when I realized that I was probably not going to die young and that while the world was indeed going to hell in many ways ecologically, I was very likely going to be around a long time since my relatives are long lived, so I’d better do something about preparing for a healthy and secure old age.

  12. js says:

    tabletoo, I think you might have hit the nail on the head on why so many boomers were financially short sighted. Unlike the WWII generation who lived through the great depression and learned to save a lot exclusively in governments bonds and bank accounts rather than the “risky” stock market, boomers doubted there would be a future and didn’t save enough period. They were wrong in their guestimate of what the future would be, and they should have saved more for retirement, run less debt etc.

    Now as a non-boomer doomer gloomer (ie a 30 something natural pessimist) looking at the world ahead I can see even more reason to be fatalistic than the boomers were. But I could be wrong. Better fund that retirement ….

  13. Martin says:

    I take your point Trent, but I also agree with Steve. Sometimes the future that you’ve been working hard for becomes the present, and when it does, you shouldn’t always continue to sacrifice the present for the future. Otherwise you’ll never get to enjoy that future you’ve worked so hard for.

    I just bought a brand new motorcycle. It’s not going to help my future, but it’s a reward for my past. A calculated reward. It’s hit my investable networth around 3%, but sometimes there’s more to life than having money in the bank.

  14. KMull says:

    We can’t forget to live our lives. It is a fine balance. One that most people usually land on the wrong side of.

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