When considering your personal finances, is there a battle between your present and future self? In this article, we look at the importance of aligning your present self with your future self.
Written and accurate as at: 10 Jul 2017
Although, this question may seem a little philosophical, it’s an important one to consider, as it may prompt you to evaluate whether you are engaged with not only your existing financial situation, but also your proposed financial situation in the future and the relationship between the two.
Often you may find your present self getting caught up with the day-to-day choices you make, without taking a step back to reflect on how these choices interact with one another and how they compound in the short, medium and long-term to affect your future self.
A commonly cited example is the compounded daily cost of a cup of coffee (and more recently, smashed avocado on toast), and how that money could be put towards benefiting your future self by saving for a house deposit, making extra debt repayments or establishing a long-term savings plan.
Other examples may include trying to keep up with the Joneses, not assessing the value of money when making ‘tap and pay’ purchases, overleveraging yourself, or simply procrastinating about your future.
Something to consider is a term called opportunity cost.
Opportunity cost refers to a benefit that you could have received, but instead gave up, to take another direction. For example, the decision to not spend a portion of your money today on your present self, and instead save and invest it to benefit your future self.
If you prefer to live in the now, opportunity cost may be a hard concept to engage with – especially if you are in the wealth accumulation stage of life. This may be due to a steady flow of income today that enables you to continue to focus on satisfying your lifestyle in the present.
Another potential reason can be due to an inability to see how the decisions that you are making now will compound over time to affect your future self – this becomes more clearly visible with the passage of time as you move closer to the retirement stage of life.
Below is a simple example of opportunity cost.
You make the decision that starting next week you will forgo the daily purchase of a cup of coffee and lunch. Instead, you prepare your own to take to work. One week in, you realise that breaking a habit can be hard, so you make a compromise by treating yourself once a week. You save the total weekly difference between the cost of purchasing and preparing your own, let’s say this amounts to $30. This $30 per week is then invested into an investment account earning 5% interest per annum.
By making this adjustment to your spending habits, your investment account grows to roughly $1,599 (1 year), $8,857 (5 years), $20,228 (10 years), $53,570 (20 years) and $108,528 (30 years). As you can see, the visual impact of compounding and regular contributions may seem small initially; however, over time it becomes more evident.
When this (or a similar example relevant to you) is combined with other financial decisions regarding budgeting, debt management and saving for the long-term, the results can be substantial and make a real difference to building wealth for the future.
If you do feel that there is a ‘battle between your present and future self’ take some time to:
- Understand how your financial behaviours may be influenced by your money personality
- Build and leverage off a professional advice team in areas such as debt management, investments, superannuation, insurance planning, taxation and estate planning.
- Practice healthy financial habits
- Create a budget and monitor your cash inflows and outflows
- Understand and evaluate your need versus want purchases
- Monitor your debt levels and consider making extra debt repayments
- Have a contingency plan in place with personal insurances
- Track down lost superannuation
- Save and invest for the long-term
- Develop and maintain your financial education.
After ticking off the first point above, you may find that this list resonates with you as the dot points provide a certain level of order and structure in which to follow; alternatively, they may be at odds with your inclination towards flexibility and spontaneity. Both reactions are equally acceptable, as everyone has a different perception of and preference for approaching their personal finances.
What’s important is to enjoy life now whilst also taking the time to connect to your future self, be motivated to provide for your future and actively consider the long-term implications of the choices you make today.
If you do need help evaluating your existing financial situation, aligning your present self with your future self, and putting a plan in place towards achieving your financial goals and objectives then please contact us.