We humans tend to assume that what has always been will always be. We get comfortable in today’s habits, routines, and provisions, assuming that everything will be the same tomorrow. This assumption that the future will basically be like the past can be healthy at times, otherwise we may constantly be nervous wrecks about what may happen tomorrow. However, this assumption can also become a bit dangerous if not managed properly, especially when we count so much on tomorrow being the same as today (or better) that we begin to spend tomorrow’s provisions for today’s luxuries.
As an example, let’s assume that someone wants to go on a luxury vacation to the tune of $4,000 but they do not have the money to pay for this vacation in full within the next 30 days. As a matter of fact, they would not have the money to pay for the vacation even if they saved fairly diligently for the next year. “No worries,” they think, “I’ll just put the vacation on my credit card and pay it off eventually.” This person has now obligated their future self – and their future self’s money – to pay for today’s luxury. What will happen when their future self now wants to go on vacation but funds are tight? Their future self will either not be able to go on vacation because they are already paying for the vacation of “Past self,” or future self will decide to put the new vacation on credit and make “future future self” pay for it. As you can see, this could become a cycle until future future future future future future self has no choice but to pay for the luxuries of all of their past selves! How painful it would be for this to happen right at a critical moment in life such as a job loss or 5 years prior to reaching retirement age. How will the final “future self” pay for all of this?
This may sound like an extreme example, but there are many people today who are paying for luxuries they committed to in years past. Their future self – now their present self – is left feeling overwhelmed, regretful, and helpless. If only they could go back to their past selves, they could give them the following advice:
- Do not assume that everything will be the same or better in the future – It’s good to be optimistic, but considering less than ideal or worst case scenarios place us in a state of mind to prepare for such scenarios.
- Think twice before committing to something now that will have to be paid for well into the future – The longer you have to pay for something in the future, the higher the risk that something could happen that prevents you from being able to pay that debt in full.
- Be careful about making future commitments with your money where no collateral is involved – When there is collateral involved, such as with a house, at least you can use that collateral to pay off the obligation that you have committed to (in the case of a house, the mortgage that you have committed to by selling your home and using the proceeds to pay off the mortgage (associated fees notwithstanding)…in the case of a personal loan of $3,000, the collateral could be a savings account of equal or greater value). When there is no collateral to back up the financial commitment that you’ve committed your future self to paying, then how will your future self repay the commitment if something goes awry down the road?
- As much as possible, save up for luxuries first, then pay for them in full and avoid having to worry about how you will pay for them later – Your future self will thank you.
- When credit must be used or debt taken on, always leave room to take care of the unexpected as well – Never commit 100% of your future money! Leave a buffer in case your future paychecks are needed to help pay for something else down the road.