Monday, November 5, 2007

Discounting Time

You might be confused about what this post will be about by reading it's title (this post is about saving or spending your money), but since the title of this blog often belies the content, I have determined that you all will just have to get used to it!

Anyway, 'discount' is a term that applies to many things. Certainly the most familiar is a price reduction or rebate, perhaps a 25% discount on a movie ticket if you are a senior citizen. The 'discount rate' usually refers to the interest rate that the Fed(eral Reserve Bank) charges its member banks for loans.

We also make discounting decisions when it comes to time, specifically present vs future. We all know that a dollar today is worth more than a dollar in the future (When I was young, a Coke cost a nickel!, etc.), and that combating such inflation requires investing and not keeping your money in the form of cash under a mattress.

There's also this question: if given an equivalent sum of money, when is the best time to spend it? Ric Edelman, a financial advisor whose column is published in The Capital, has this advice:

I offer a simple game plan: Walk up to your spouse, look him or her in
the eye, and say, "Honey, I'm sorry that we won't be able to retire, but it's more
important that we watch HBO." Then call 911 or a divorce attorney.

Mr. Edelman was making the point that you can find the money to contribute to a retirement plan if you want to, but his view rests on the following assumptions, if not more:

1. Money spent in retirement years produces more enjoyment than money spent today.
2. Free time when you are older is more enjoyable than free time today.
3. You will not be able to earn enough money in the future to cover your needs/wants.

In other words, he is telling you to sacrifice yourself in the present for the benefit of yourself in the future. This is a good strategy for some, but not for everyone. The following would be reasonable arguments for not saving money when you are young:

-You are convinced you will die at a young age.
-You think your income will increase significantly in the future and be sustainable.
-You like working and don't want to retire.
-You think that you can have more fun when you are young.

It would be enough for me if the readers of this blog realized that they make financial decisions not only between various goods and services, but between different time periods as well.

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