How can we balance our current and future spending so that we are both financially secure and satisfied throughout our lives?

This article explains how and why it’s important to balance current and future spending in light of a person’s lifetime income, and the various factors that influence spending habits.

 

If the question is, “How much is too much?” historian Thomas Plough would say, “Tomorrow’s chicken is better than today’s egg,” and author Samuel Johnson would argue, “Whatever you have, spend it sparingly.” So how do economists answer? So how does an economist answer? The purpose of making money is not to get rich. It’s about money-based consumption and the satisfaction it brings. The question of “how much money to make” is no different than “how much to spend” because the ultimate human satisfaction is to get pleasure from consumption.
In the eyes of economists, consumption is more than just the use of money; it is considered an important factor in determining the quality of life. The satisfaction we get from consumption is directly related to our happiness, which affects not only our economic security, but also our psychological and social stability. Therefore, economic analysis focuses not only on the quantity of consumption, but also on the quality and efficiency of consumption. For example, the difference between the satisfaction of a cup of coffee at your local cafe and the experience of a new culture in a travel destination can be seen as a difference in the quality of consumption.
If you know how much money you’ll earn in your lifetime, it makes sense to spend it all and leave nothing behind when you die. There’s no reason to make a fortune that you won’t spend in the first place. But it doesn’t end there. To be a rational consumer, you need to specifically solve the problem mentioned by Thomas Plough and Samuel Johnson: how much is reasonable to spend now and in the future?
To determine current and future consumption, we need to calculate the amount of income an individual can earn over their lifetime. For example, before you get a job, you will have no or low income. Once you enter the workforce, you know your average tenure and annual salary, and you can calculate how much your salary will increase each year. Based on this, you can estimate your lifetime income. Now, let’s think about your optimal consumption now and in the future. First, you need to understand that there is a trade-off between current and future consumption. If you have a given lifetime income and you consume a lot now, you’ll only have a little in the future. If you set aside a portion of your current spending for the future, you can save that amount. Over time, this will bring you additional income in the form of interest as well as principal. In the future, the increase in interest on the principal will allow you to spend more.
These spending and saving decisions will vary depending on each individual’s lifestyle and goals. Some people may prioritize current consumption because they want to gain a lot of experience in their younger years, while others may want to reduce current consumption and increase savings for a secure retirement. Therefore, you need a financial plan that takes into account your personal values and priorities. For example, if you love to travel, it’s important to plan ahead to fund your travels and ensure you can still enjoy them in retirement.
However, reducing current consumption comes with pain. This is because, under the same conditions, people are more satisfied with events in front of them than events in the distant future. For example, imagine handing someone a chocolate on Valentine’s Day and asking, “Do you want it today or tomorrow?” Most people would say, ‘Today. They’d rather experience the pain first, as in the saying, “It’s better to get hit first.” This preference for the present over the future is called “time preference”. So, while reducing current consumption and increasing savings can help you earn interest income for the future, you have to give up the pleasure of current consumption due to time preference.
In this regard, economics has developed various methods to measure and analyze people’s time preferences. One of them is the time discount rate, which quantifies the degree to which people value the present more than the future. People with a high time discount rate prioritize current consumption, while those with a low time discount rate value the future more. This difference has a significant impact on an individual’s financial management and spending habits.
If the effects of interest income and time preference are offset in the long run, the optimal amount of consumption can be determined by considering the respective satisfaction of current and future consumption. After all, rational consumption over a lifetime is spending the same amount today, tomorrow, and the day after tomorrow. In other words, spreading your consumption evenly over your lifetime is more rational than spending too much or too little when you’re younger, which makes sense if you think about it.
On the other hand, one of the important factors related to consumption is the individual’s life cycle and expected expenditures. For example, different amounts of money are needed for different major stages of life, such as education, buying a home, raising children, and retirement. It’s important to plan for these milestones. You should also consider building an emergency fund for the unexpected. This will help you prepare for a variety of variables, including sudden medical expenses, job loss, natural disasters, and more. At the end of the day, frugal spending isn’t just about balancing the present and the future, it’s about being prepared to be flexible and responsive to different situations. It’s an essential process for a lifetime of financial security and happiness.
Finally, social and cultural factors also play a big role in shaping spending habits. Advertising and marketing, the influence of family and friends, and social expectations are all important factors that shape our spending decisions. Therefore, it’s important to recognize these external factors and make sure that your consumption is in line with your real needs and desires.