CONSUME NOW OR SAVE FOR LATER? That’s the question by Ron Copley, Ph.D, CFA, LOL contributing writer
Each of us, according to particular circumstances, faces a basic question regarding how to handle personal finances. The most fundamental issue at hand is whether to spend now and enjoy the fruits of our labor with immediate consumption, or postpone gratification by deferring consumption to down the road. It boils down to a trade off between living for today and planning for tomorrow.
During my 30 years of working in the financial services industry, I have seen many married couples wrestle with the consume-save tradeoff. Philosophical differences over money within a marriage can cause high tension and often affects other aspects of the relationship. Unfortunately, nobody has an easy solution. Still, an open and honest discussion can help.
The person who wants to consume now is a pessimist while the one who wants to postpone consumption is an optimist. The pessimist sees doom and gloom on the horizon as the justification for current spending on items such as a new car, even though the old one is still functional. “After all, we may not be alive tomorrow,” the pessimist says. The optimist sees a brighter day tomorrow and wants to save the new car payment to invest for retirement.
Noted 20-century philosopher and noble-laureate economist John Maynard Keynes had something important to say about the consume-save dilemma. Keynes describes the instincts that drive human behavior as “animal spirits.” He claims a large part of positive action as opposed to inaction depends on spontaneous optimism—not cold mathematical calculations. Keynes’ comment strongly suggests periodic bouts of market irrationality. Over the long term, he says the market is rational through its self-correcting mechanism.
Keynes’ theory of consumerism is intricately linked to capitalism. Today, over two-thirds of all economic activity in the USA is related to consumer spending, the highest percentage in the world. A high level of spending creates robust demand for goods that props up factory employment domestic and foreign with collective benefits for all.
International trade allows workers in less fortunate counties to enjoy an increase in their standard of living from wages they otherwise would not receive, and Americans enjoy inexpensive, high-quality goods. The Vietnamese economy is growing at 6 percent per year, with exports at 30 percent and wages at 9 percent. The global middle class is expanding at the fastest pace in history, giving more people adequate food, shelter, and clothing—all due to consumerism/capitalism.
Foreign trade is a win-win for everyone with the ultimate but ever-elusive goal being peace, due to global interdependency. Peace on earth is the Creator’s commandment. We are all one and equal, and should act accordingly instead of killing each other.
Emphasis on consumerism has made America the central demand point for world goods and has provided its citizens with a very high standard of living—the envy of the world. Since WWII, the trend has gradually shifted toward the rest of the world, but the tilt still favors America clearly. I have worked in 11 foreign countries and cannot count the number of people who have approached me about their desire to come to America. They would give their eyeteeth to raise their families here.
In 2018 alone, almost 1 million newcomers have applied for US citizenship. America is not the last great hope of mankind; it is the only great hope of mankind. We enjoy privileges of freedom, the rule of law, and respect for human rights—which most other people on the planet can only wish for nightly.
Consuming today assumes tomorrow will take care of itself, but that strategy has risks. I grew up believing in the American dream and still hear the same mantra in young people today. Hard work and discipline pay off here, regardless of birthright. But are we sure tomorrow will take care of itself? Will our wages and standard of living continue to increase as in the past, or should we throw caution to the wind and collect as many toys as possible to enjoy now?
What if tomorrow we don’t have sufficient savings to maintain adequate care in old age? Who then will take care of us? The government? Our children? Strangers? Personally, I don’t want to burden my child, and I do not want to entrust the government with such an awesome responsibility. Thus I must save and invest for growth, and accept the inherent risks associated with the stock market. Low-yielding T-bills and bonds do not meet the challenge; they are not growth investments. Actually, these investments generate losses due to inflation and taxes.
My growth strategy is grounded in realism. Anyone who doesn’t have old family money (I don’t) must invest for growth, with whatever excess wages they can accumulate. It will protect them and allow them to remain burden-free from others in old age.
A truly professional financial adviser can be a very important person to help with consume-save tradeoff decisions, especially one who is 100 percent fiduciary committed to a client’s well-being and not to his or her own. LOL
Send questions to [email protected] Ron Copley is principal of Copley Investment Management, a Registered Investment Adviser in Wilmington. Besides managing money for individuals, retirement plans, and foundations, he conducts business valuations for the legal community and teaches part-time at UNCW.