With every dollar you have, you make a choice: Do I use it to satisfy me now, or do I use it to satisfy me in the future?
And that is the fundamental tension with money, and in the practice of financial planning. When we think about personal finance, we tend to think about how to lower taxes, exercise stock options, max out our 401(k)s, etc. Those are all involved, of course, but they’re Step 3, at best.
Don’t let those very specific questions distract you from the biggest issue:
With this next dollar, do you want to give it to the Now You or the Future You?
Because you both have wants and needs, even if Now You’s wants and needs are, of course, more obvious. But when the Future You arrives, if you haven’t honored her in your money choices, she’s gonna be pissed (or depressed or regretful). And possibly even in trouble.
On the other end of the spectrum are people who always think about the Future You. But once they achieve some level of financial strength, they start to think, “But what for? Surely not just for the sake of stockpiling dollars?” The Now You is getting pretty sick of it. I recently spoke with a mid-20s couple of this stripe, and the wife summed it wonderfully: “I don’t even have a dining room table, and that pisses me off!”
Now, I was raised on stories of how my parents made do with cardboard boxes for every piece of furniture (except, presumably, a bed) while they were in grad school, so I personally lean toward the Future Meg instead of the Now Meg. But that’s just my money history. What’s yours?
“Savers” versus “Spenders”
Most of us don’t usually talk about the Now You and the Future You. We usually think about people who are “Spenders” or people who are “Savers.” But it’s the same thing. And I think “rebranding” it as Now You and Future You might help us achieve a more balanced view of what we do with our money now.
In our culture, savers are Good and Virtuous people. Whereas spenders are Self-indulgent and Lack Willpower. At least, that’s the impression I’ve gotten over the years from so much personal finance writing and teaching. And yet, and yet! we continue to be a nation of spenders, not savers. So, clearly, this “a saver, not a spender be” advice is not working.
What if, instead, we honored both saving and spending and simply helped people figure out the right balance?
If You Don’t Know Any Better: Rules of Thumb
Figuring out the right balance between Now You and Future You is hard. If you feel you can’t figure out a balance tailored to your situation, I think rules of thumb are a very reasonable approach to take. Some examples of rules of thumb:
- Retirement: Save 10% (or maybe 15%) of your pre-tax income for retirement.
- Housing: Don’t buy a house that costs more than 2½ years’ (or maybe 4-5 years’) worth of your income.
If you don’t know any better, you can probably avoid making giant mistakes by following these rules of thumb. I mean, wouldn’t most people be better off if they saved 10% of their income for retirement?
The problem with rules of thumb is that they don’t know you. And as such are probably always going to be at least a little wrong for your situation. Perhaps more importantly, exactly because they’re not tailored to your situation, you’re unlikely to feel any particular motivation to hold to them. Who feels intrinsically motivated to save 10% for retirement? Come on now, raise your hand…
And making changes requires motivation (why am I doing this?), an understanding of the mechanics (how do I do this?) , and a clear path (make it easy for me to do this, please). These are the elephant, the rider, and the path, according to the awesome book about “how to change things when change is hard,” Switch.
A Better Way to Balance
I’ve just finished reading a professional book, called Financial Planning 3.0. (I don’t recommend you read it…unless you’re a financial planner, of course.) In it, the author starts to lay out a theoretical foundation for the profession of financial planning.
I mention it for one point that the author makes time and again: the notion that we live in a sea of money just as fish live in water. At this point, in the 21st century, “people’s lives are touched daily by their financial choices and requirements.” But just as fish don’t think a lot about water or their relationship to it (or so we assume, ahem), most of us don’t think about money and our relationship to it. And we are very much the worse off for it.
Finding a meaningful, workable balance in how you use your money requires that you understand yourself and your values, and understanding that requires time, intention, and thought. That part is inescapable. Thankfully, you can find your own way of doing it.
- With a good financial planner. For example, in my practice, I spend the first two meetings with a new client discussing money stories, money memories, values, priorities, and what the person envisions for their future. We don’t talk about 401(k)s or company stock or bank accounts.
- By reading books. Earlier this year, I attended a talk by a Seattle money coach about how directly affected your spending and saving habits are by your body chemistry (dopamine for the win!). She recommends three books to help you better understand your relationship to money.
- With other folks. Again, not everyone needs to hire a professional, but everyone does need accountability. So, go through those books, or similar, with a friend or partner. (This article gives some ideas for working with friends on financial goals.)
In order to feel comfortable with your choices about your money (spend it? save it? give it away?), you have to know what matters to you. You also, to be sure, need to understand at least the basics of modern money management. Yes, you do need to understand how your 401(k) works, or how your stock options work. But until you understand your relationship to money and your values, making the right money choice is going to be more a matter of luck than anything else.
While that might be a daunting prospect, for me it’s also an exciting and empowering one. All those talking heads nattering on endlessly about investing tips? All those people at work giving you unsolicited advice about your 401(k) or company stock? Turns out, they Don’t Know Shit.
They might understand the technical bits well (and then again, they might not), but I can guarantee you they don’t know what’s truly important to you, and that’s the guiding light in every financial decision. It turns out that, yes, you are best equipped to make your own financial decisions, even if you need some guidance, education, and encouragement along the way.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.