Friday, June 12, 2009

What's the right mix of the present vs the future?

What's the right mix of the present vs the future?

I'm an avid frugality blog reader. I think Get Rich Slowly, The Simple Dollar, Wise Bread, Blueprint for Financial Prosperity, Fivecentnickel, Lazy Man and Money  and others are great resources for tips on how to save (and make) more money. One of the simplest yet more profound tip, the heart of frugality I think, is that reducing what you spend is more powerful than earning more. Whatever you earn, gets taxed. So 10-30% is gone right off the top. But if you can reduce spending, you keep 100% of those savings. I digress -

A recurring theme in a lot of frugality sites and books is if you sacrifice today, you'll have a better tomorrow. Many people have dreams of retiring to a warm locale, by a pool or beach, having tropical fruit drinks all day while lounging. And I'd take that in an instant for sure. But I don't necessarily want to wait 45 years for that.

Yet I also am not in favor of spending everything you earn each paycheck. My wife and I make heavy contributions to our 401k plans, ROTH IRA and other investment vehicles. We're dedicated to saving for retirement. Example - I love Chipotle, but I've pretty much given it up in order to save those dollars for retirement and charitable contributions (feel free to check out the Wounded Warrior Project, Arlington Free Clinic or your local hospice; all great services in need of your help). We've made a lot of modifications to our habits and behaviors now for the benefit of our future.

So is there some rule of thumb for this mix? Besides a gut feeling, which for many (though so far neither me nor my wife) can lead people down the primrose path to debt, there don't seem to be any good guides.

And I know the answer to the question of the post is "it's different for everyone", but I think most frugally minded people struggle with this balance, whether they know it or not. At what point does my frugality now actually reduce my overall level of happiness? From an economics perspective, there's utility to be achieved in the present and future. We have to discount the future utility, as we don't know when it will come etc (like any future cash flows). So at what point does not taking a vacation now in order to theoretically take on in the future became detrimental? Skipping on a fancier cut of meat for us to cook at home (why pay someone to cook it for us if they can't do it better?) for a dinner out when I'm retired?

I don't have the answer, but I think in general I'm learning that we are valuing our future a little too much. My wife does an amazing (!!) job of making sure we're on budget each month with our grocery bill, coming up with ingenious ways to decorate our house with quality items on the cheap, etc. I'm ever vigilant about our utility costs, finding new ways to pinch pennies in other areas, etc. And we both are willing to make the sacrifices in order to fully fund our retirement savings.

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