Imagine I handed you $1,000 to spend on your child’s education and gave you two choices of how to use the money. You could either spend it on an amazing summer camp that would help your child develop skills today. Or you could invest it in a college savings account and have it help pay for college in the future. What would you do?
OK, I’m sure many of you out there are poking holes in my little thought experiment. Maybe you’re saying “I don’t have kids,” or “I’d rather spend it on something else” or “It depends on a whole bunch of other stuff.” Yes, all good points. But the details don’t actually matter that much for what I'm getting at. It’s the broader concept that I think is so interesting:
How should you evaluate the trade-off between spending TODAY on things that are important to you and saving for things that may be important in the FUTURE?
I’d love to hear what you think in the comments. What was a short term/long term trade-off you made recently and what factored into that decision? Here’s how I’ve come to think about it:
Use purpose as a lens for decision making
I think the decision of whether to spend now versus later can be quite hard without some sort of broader context to fit the trade-off into. I found it helpful to zoom out and think about why I had the money in the first place. What was the PURPOSE my money?
Money matters to me for two main reasons. First, it provides financial security, ensuring that I’ll have a roof over my head and food on the table for the foreseeable future. Second, it helps me accomplish things that support my values, like giving my kids access to a good education. So those are the two lenses that I now use to prioritize where my money goes.
Create a secure financial foundation
When I started prioritizing, the first thing I wanted to do was to make sure I had financial security nailed. I think it's a little like Maslow’s hierarchy of needs. You need to meet some basic physiological and safety needs before you can get to self actualization. For me, creating basic financial security meant:
Putting a few safety nets in place:
A emergency fund to make sure my family could cope if we experienced a big financial shock
Insurance to protect against loss of income and other important assets
A will and some other elements of basic estate planning to make sure our kids would be taken care of
Proactively setting my family up for future financial success:
Figuring out when to pay down debt and when to invest
Figuring out roughly how much we’d need to fund a comfortable lifestyle in retirement and making sure we were saving/investing to meet that target
Build up around values
Once I had built some basic financial security into the picture, I started to think about how my other values fit in. My kid’s education is high on that list. But there are a ton of ways that money could potentially support that value--hence the ‘summer school’ versus ‘college tuition’ thought experiment I started with. And then there’s the uncertainty that comes with planning for potential future outcomes. Will my kids even want to go to college? (Oh, I do hope so!) Will online platforms completely disrupt education and make everything free? (Probably not, but who knows?)
The point is that there are a lot of variables and a whole lot of unknowns. So to me, it made the most sense to gather data where I could and put a stake in the ground in a couple of key areas. For instance, it was helpful to actually talk with my spouse about the things we value and that we’d like our money to support. It was also helpful to do some basic math to figure out what it would take to pay for related long term goals, like college tuition. Then we could decide how much we’d like to allocate to things that are further out, just to know we were covered at some level. Now, with a few stakes in the ground centered around our values, when the short term stuff comes up, like the myriad of amazing summer camps that seem to exist out there, I feel less pressure to make this weighty trade-off decision. We’ve already thought about the big stuff, so if something is going to add a lot of value to our lives for the money, and we have the cash flow to cover it, we feel OK about doing it.