Should I spend money today (to enjoy life) or save for the future?
This is a common dilemma faced by most people.
The amount of money you have is (sadly) limited. Naturally, you have to decide whether to use it to spend on things today or to save it for the future.
People have thousands of reasons for not saving for the future. Some will say that they don’t make enough money to save – which is acceptable if true. Others cant stop spending money as according to them, life is so uncertain and therefore its better to live for today and deal with future… in future.
On the other hand, there are many who save a lot. At times, they end up saving a little too much. Result? They have big bank balances or portfolios. But sadly, they are unable to enjoy their lives optimally.
So spending today vs. saving for tomorrow – What is right here? Or is it even worthwhile to contemplate about taking sides here?
How can one enjoy life today while saving for tomorrow?
This is not an easy question to answer.
Why Spending Today is important?
Now this question may seem strange coming from a financial advisor.
But it is important to not shortchange your life today. What is the use of having saved up crores of rupees without any rhyme or reason?
A relative of mine has a young daughter (with no plan for more children). He went to the extent of saying that given his high income, he saves much less than what he can actually save.
That’s because at the end, his daughter will get married and he doesn’t want to be remembered as an ultra-rich father-in-law who saved a lot.
Interesting way of looking at things.
To put it simply (and as my wife once told me), we should not screw up a very long journey for the sake of a distant goal. It may really not be worth it.
Take for example a person who works very hard, sacrifices his family life, his passions, saves a lot of money and doesn’t spend much. At the end of the day, he will be very rich. And when he dies, even then too. But what is the point of being the richest person in graveyard?
People constantly regret not having lived their lives to the fullest.
Why Saving for Tomorrow is Important?
Now before I move forward, please understand that by ‘saving’, I don’t mean ‘not spending‘. These are two very different things.
And you will find countless examples of people who don’t have much savings despite their best efforts to not spend money. It can be frustrating.
I have no doubt (and neither should you) that savings is important. Even if people close to you need some convincing.
It doesn’t feel good at first but its necessary. Just like exercising or going to the gym. It hurts at first but pays handsomely later on.
Saving is necessary because one day in future, you will stop earning (retirement). You will then have to have a big pool of saving from which you can withdraw money to survive in your retired life.
And mind you… most of you reading this won’t die early or the day after retirement. 🙂 Thanks to our doctor friends, most will live for atleast a couple of decades after retiring. So you do need a lot of money for your non-earning years. And you can’t depend on your children to be your retirement fund. Its that simple.
That is not all.
Retirement is not the only financial goal.
There are several other important financial goals lined up on your way to retirement.
Children’s education, their marriage, your house purchase, car purchase, a foreign trip, etc. All these require money and most times, a lot of it.
You can’t fulfill the fund requirements for these goals from regular income alone. You need to save for these goals and allow your savings to grow on their own. That is how you will find the money you need to achieve these goals.
So saving today is necessary. Period.
But what if you feel like…
Let’s Spend Money Now. Will save MORE later. Does this work?
It might work. But here is the practical difficulty here.
Lets say that when you are young, you decide to spend money freely and save later. But since your parents were pushing you hard to save something, you decide to save 5-10% of your income to show respect to them.
But saving just 5-10% of your income also equates to the fact that you are permitting yourself to spend 90-95% of your income!
And so with each annual increase in your income, you are continuously raising your lifestyle costs too.
Now when you say that later on in life, you will start saving more (and it better be a lot more as this proof shows), it will be difficult for you to downgrade your lifestyle expenses.
And its quite possible that inspite of saving much more later on, your savings turn out to be woefully inadequate because spending and lifestyle costs have increased so much.
So if saving is so important…
Then why do Most People avoid saving for the Future?
Maybe its because of how we humans have evolved from the animals.
In the book Art of Thinking Clearly, the author points towards a human bias that is similar to animals:
Animals will never turn down an instant reward in order to attain more in the future. You can train rats as much as you like; they’re never going to give up a piece of cheese today to get two pieces tomorrow.
As humans, we give more weightage to the present than to the future. At the cost of better options in future, most of us chose less better options today. That is a reality. And that is why people find it tough to save for future.
There was a famous experiment that was conducted to highlight people’s ability (or rather inability) to delay gratification. In this experiment, which was called the Marshmallow experiment, children were given a choice between:
- A small prize (1 cookie) that they can have right now
- A bigger prize (2 cookies) later on
And the results were interesting. Have a look at this video:
Or if you can’t see the video above, click here for the direct link to video.
Balancing the Two
Being on the extremes can be glamorous. But its not sustainable.
You can’t just keep spending without going bankrupt sometime in future. And you also can’t keep saving everything without screwing up your normal life.
So as far as I think, balancing the two is what we should aim for.
How you will achieve that balance depends on your actual situation. There is no one fixed right answer here. In addition to saving and spending, there might also be a 3rd option in many people’s case – prepaying loans.
But somewhere between spending 100% and saving 100% (both theoretical), there is a sweet spot where you can live well today and also save reasonably well for tomorrow.
And the easiest way to do it is to…
Decide on your ‘YES’ to know when to say ‘NO’
Previous sentence highlights that if you are clear about what you really want in the short and long term (lets call them your financial goals), it will be easier for you to stay focused and spend accordingly.
Take an example from your childhood. If you had an examination tomorrow, you will not spend your time fooling around today. You will sit and study. Or in many cases, you will be forced to study. 🙂
So in reference to spending vs. saving debate, if you know what you are saving for and how important it is for you achieve it, you will spend accordingly.
It will help you stay on track.
For example, you want to make a large down payment for your house after 3 years. Now if you are reasonable, you will do everything in your capacity to save as much money as possible in next 3 years for the downpayment. Most people in that situation will not go out every weekend for parties and spend thousands of rupees.
You need to decide on your ‘YES’ to know when to say ‘NO’
So once you know your Big YES (i.e. save for your dream home’s downpayment after 3 years), you will know when to Say NO (i.e. spending money recklessly on parties).
And by doing that, you are not depriving yourself if you don’t spend money on parties. On the contrary, you will be depriving yourself of what you really want (house), if you spend money on parties.
Delaying gratification is not a happy experience to start with. But the trick is to put in place strategies that can help you do that. Because doing that is the only option to achieve your goals by balancing today’s spending against saving for tomorrow.
I am not asking you to save everything.
I am also not asking you to not save anything.
But take some time out and have a hard look at your spending habits.
Certainly, there will some fixed expenses that you just can’t wish off. But apart from those, spend on things that are truly important. It might mean cutting back in other areas today to save for tomorrow. But there will always be better things in future that are worth that trade-off.
It is possible to save wisely and live a good life simultaneously. And even before you decide about taking sides on saving vs spending debate, sit down and think deeply about what you really value.