You can do everything right and still get the wrong answer, because, in the beginning you sought the wrong right answer. Strategic level thinking emphasizes balance and careful definition of goals and the tradeoffs required to get what you want.
We are three people, separated in time. What we do or fail to do in the present will affect what we can do in the future. What we have done in the past affects what we can do in the present or the future. Assuming we are paying off the debts from our past, the great risk for most of us is that our “present self” PS, acts in ways that our “future self” FS, finds to be wrong.
Spending all your income instead of saving some for the future is an example of disappointing your FS. So is failing to buy adequate insurance. So is making a debt commitment that will absorb too big a share of future income, like when interest rates go up.
While most fall into the disappointing FS category, there are some who fall into the disappointing present self category. It is possible to over-save and under-consume. The flaw usually arises in people who have an overdeveloped security need, maybe because something went terribly wrong in the young lives, or maybe because they don’t know how to do the arithmetic required to decide what the balance is.
In 1985 I had a client who had a serious imbalance problem. He had enough money to retire in 1978, but he was still vibrant and enjoyed his work so he decided to work a little longer. As the fossils will remember interest rates between 1978 and 1985 were quite high. The result, he saved more money and that coupled with the interest rates about tripled his retirement plan assets.
In 1985, he spent about one third of his income, paid about a third in income taxes and saved the rest. Not the worst problem you can have, but nonetheless he was a little bitter.
His wife had become ill and could not travel but that was okay because travel was not something either cared about deeply.
What bothered him was this. In 1956 he had his debts paid and some money saved and he decided that he should have a new car. He wanted to buy a Buick, but his FS said. Wait! That’s expensive, you need to save some. So he bought a 2-year-old Chev instead and saved the difference.
His words, “I should have bought the !%*$ Buick.”
There is a lesson for all of us.
Money is to be used to acquire the things we value. It can provide security and income and help for children or for others. Money is not value by itself. If it is not doing something, you cannot tell much about it.
If I am in a facility for Alzheimer patients and share a room with another similarly afflicted person and one of us has 1,000 time more money, how would anyone be able to tell?
It is easy to pay attention to your past self. Creditors help you notice if you don’t remember. The future self versus present self is harder. Do the arithmetic and check regularly. Do not short-change the present. You cannot take a 32-year-old child to Disney World and get the same feeling you get by taking them when they are 9.
Saving too much is as wrong as saving too little.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. email@example.com