In the moment where you simply want something, it’s really tempting to find justifications for it, and one of the easiest justifications is to simply say that your “future self” will pay for it.
You can use a credit card, after all, or some kind of payment plan. The actual payment won’t happen today or tomorrow. Instead, it will happen at some point in the future down the road when, theoretically, you’ll be better financially equipped to handle that bill.
I used this “future self” as a big crutch throughout my life. My “future self” would save for retirement, so I didn’t have to save much yet. My “future self” will be able to afford that house. My “future self” will pay for this car. My “future self” will pay off this credit card.
There’s nothing wrong with being optimistic about the future. That’s generally a good thing. However, taking financial risks based on that future optimism can be a horrible mistake.
What Your Future Holds
The truth is that your future self is going to be facing a lot of challenges that you actually don’t have right now.
Your future self is more likely to be severely disabled
As you age, your chances of having a severe disability grow substantially. Not only does your chance of a disabling injury continue (and slightly increase) throughout your life, your chances of a genetically-triggered disability also increase throughout your life.
In other words, there is an ever-increasing chance that between now and when you think your “future self” will take care of your problems that your “future self” will wind up in a state completely unable to take care of those problems. In fact, your actions today will actually make the problems of your “future self” far worse.
Your future self is likely to have more consumer debt
Although piles of consumer debt are sometimes thought of as being a problem of younger people, it turns out that it is the oldest among us that face the largest piles of consumer debt. Often, as people reach retirement age, they’re facing a huge pile of credit card and other consumer debt due to all of their recent purchases.
In other words, if you visualize a wise “future self” that will have the financial ability to take care of this debt you’re building right now, it’s probably a false hope. It’s much more likely that your “future self” will actually have more debt than you have right now.
Your future self will have fewer years to take advantage of compound interest
It’s easy to believe that your “future self” will be the one that takes responsibility for retirement, and that may (or may not) be true. However, your “future self” will have a much harder time saving enough for an adequate retirement than you’ll have if you start right now. That’s due to compound interest.
Let’s say you put away $1,000 for retirement at age 25. Naturally, you’ll be putting away some amount each week or each month, but we’ll stick with the simple dollar amount. At age 70, that $1,000 will turn into $21,000 (assuming a relatively steady 7% annual return).
However, if you wait until age 45 to save that $1,000 for retirement, you’ll only have $5,427 at age 70. In fact, to get to $21,000 at age 70, you’d have to contribute $3,900 instead of $1,000. That disadvantage only gets worse and worse the longer you wait.
Your future self will likely be facing higher tax rates
Not depressed enough about your future self? It turns out that your future self will also likely be paying higher tax rates. That’s right, a higher percentage of your future self’s income will go to the federal government than what you’re experiencing right now.
In other words, even if everything goes great and you’re not disabled and you actually are able to earn a big salary in ten or twenty years, the likelihood is that you’re going to wind up paying a higher tax rate at that time, eroding your gains.
What Should You Do About It?
The truth of the matter is this: even if your intentions are perfect and your future self really is more responsible, the odds are still stacked against your future self.
Your future self is just not someone you can rely on to take care of your finances. There are just too many strikes against your future self.
So, what can you do about it? The key, of course, is to take care of yourself and your future self right now.
Instead of holding onto a mindset where your future self will clean up your mistakes, adopt the opposite mindset – you’re going to take care of the mistakes of your future self today. After all, the odds are that your future self is going to be in an unluckier position than you are and will need that extra help.
Start spending less than you earn. That means cutting back on your most wasteful expenses and finding better and less expensive ways to take care of your typical expenses. You don’t have to delve into a miserable life here, but you can do things like cutting back on beverages from the gas station or spending as much on entertainment. It’s also worthwhile to find ways to trim your already-existing expenses without losing anything, like taking steps to make your home more energy-efficient.
Start saving for retirement. Just do it. Head over to your HR office at your job and start contributions to your 401(k). You barely notice the change, but you’ll be helping out your future self big time. This one’s all about the power of compound interest, because the earlier you start saving, the less you need to save per year and the more you’ll wind up with when you reach retirement age.
Get insured. You don’t need to have all kinds of insurance, but if you have any dependents, you should at least have a term life insurance policy. If you have dependents, then you have people who rely on your ability to provide an income for them. Your children need the money that you earn, in other words, and the only way you can ensure that for them in the event that you pass away early is to have a life insurance policy. I recommend term life insurance, not other types.
Write a will. This is just another vital step to take care of any dependents that you may have. It helps to ensure that personal items wind up in the correct hands as well as ensuring guardianship of your children in line with your wishes. You may also want to have a durable power of attorney, too, which will help make sure that someone you truly trust will make legal decisions for you in the event that you’re unable to do so.
Build up an emergency fund. Your future self is likely to face emergencies. Saving a little for those emergencies right now will help you out. A good first target is $1,000, but eventually you’ll want an emergency fund large enough to pay for at least a few months of living expenses. We have an emergency fund that pays for several months of expenses for our whole family.
Pay off high interest debts without building more high interest debts. Your high interest debts are the biggest weight around the neck of both your current self and your future self. Get rid of them as quickly as you can. Start by paying off the one with the highest interest rate and work down the chain. Anything with an interest rate over 10% needs to go as quickly as humanly possible.
Your future self is not reliable, period. You cannot fully depend on your future self to take care of the mistakes and problems that you’re generating today.
Right now, you have the best situation possible to take charge of your financial situation. It is every, very likely that you will never have the good opportunities you have before you right now. You will never be as young as you are right now and it’s extremely likely that you will never be as healthy as you are right now. It’s also very likely that taxes are going to be higher than they are right now.
What does all of that mean? Right now is the moment to step up your game when it comes to financial responsibility. The path to responsibility is wide open for you and it will never be as open as it is right now. Every time you choose to delay it, you hand that responsibility to a point in your life where it will be harder to be successful.
Don’t let it happen. Take charge now.