I have had some questions from the folks about treating investments as time machines. Here is why the image works and matters.
Money is always earned in the present. You cannot earn interest or salary a month from now. You earn it by the day or month. Money pays for your past, your present and your future. It also pays the government, but that is a question for another day.
Money earned and consumed in the present is lifestyle money. The key point is “consumed.” A wider idea of the old, “You are what you eat,” idea.
Money that is not consumed is allocated to either the past or the future.
When you buy a car or a house and finance it, you spend money in the present but you have not yet earned it. You believe you will possess that money some day and will use your “debt time machine” to make the purchase today. You use the machine to send money back to the point of purchase. There is a fee to do so. Interest.
Debt obligations reduce the amount you can consume in the present. You spent the money some time ago plus you must pay the transportation fee.
When you save money you are using the “future time machine” to transfer to the date when you will consume it. Future time machines come in many flavours. Investments.
Investments have other characteristics. Some pay you a fee to send money ahead. (Profit) Some never actually deliver the money to you. Maybe a transit accident. PSome are affected by external things like taxes and inflation.
A financial planner’s primary role is to decide and help implement balance around four issues:
- What commitments carry forward from the past. Some are contractual like a mortgage, others are implied like costs to raise children, or eat when you retire.
- What is or should be sustainable consumption or lifestyle given knowledge of the financial past and a set of assumptions about the future? Rate of return, inflation, life expectancy, taxes, earning ability, current debt, objectives for family, and more.
- What risks are there that might imperil the plan and what tools are available to mitigate those?
- What efficient methods are available to assist in balancing all the factors.
The gist of it is that you can spend a dollar just once. If you spend it now, you cannot use it to reduce debt or provide assets for retirement. If you commit to spend it in the future by incurring debt today, the dollar will be unavailable for either the future or the present. If you save too much, your lifestyle today will be less than it could be.
It is about balancing wealth, needs, wants, hopes, fears, expectations, and risks in and over time. Ideally with a margin for error. Security.
Once people get the idea that the past and the future are closely connected to the present and there are devices to move money around in time, they come to realize that “best sustainable life style” is the abstract goal.
Sometimes a helper to do the arithmetic, to find the specific tools, and to counsel on what choices there may, be is useful. It is difficult to be your own planning assistant because you tend to always agree with yourself. You are too close to the emotional components and you don’t know enough of the relevant systemic details.
Build your plan so your future self will be satisfied with the actions your present self has implemented.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: firstname.lastname@example.org