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.