The Importance Of Thinking About Tomorrow

plan for your financesAll of us have dreams or long-term goals. However, in the short term, we often don’t take the action required to achieve them. Our finances, in particular, are affected by this behavior. Although we know we should be saving and keeping abreast of investment news, it often difficult since we only benefit from it far into the future.

Considering the future

The delayed effects of our actions make the promise of future rewards vague. In fact, many people are, despite the current economic gloom and doom, buying new vehicles. We decide between saving and spending on a daily basis, our emotions battling our rational practicality. Many of us tend to use money today instead of thinking about tomorrow.

Behavioral psychologists have developed a scale called Consideration of Future Consequence or CFC. This scale quantifies how much imagined outcomes influence us. People who have high CFC scores tend to focus on the long-term consequences of their behavior instead of their short-term needs. They think ahead and make decisions that protect their long-term well-being. If your CFC score is high it means you’re more likely to save, while a low score indicates you tend to think about the present, regardless of the impact it might have on the future.

How can we change our behavior?

Saving is important, but it’s no fun only living for the future, never spending your money. Perhaps the solution is aiming for some middle ground. Find a compelling short-term incentive to help you take action to get a much larger reward in the future. Ask yourself these questions:

  • What are the long-term goals I want to achieve?
  • What actions are needed to achieve these goals?
  • Must I perform these actions on a regular basis and are they likely to cause some unpleasantness or discomfort?
  • Instead of focusing on a reward in the distant future, what kind of substitutes can I use as immediate rewards to motivate me?

We are typically motivated by short-term rewards. By making use of these reward structures, you can distract yourself from the short-term sacrifices you are required to make. Consider holding off on the purchase of that new car and using the money to invest instead. This might be seen as a big sacrifice, but rewarding yourself with a smaller indulgence allows you to soften the blow. Reward substitution helps you to make strategic choices, allowing you to live the life you desire, now and in the future.

If you are fortunate enough to receive a bonus, then consider investing the money. Balanced funds, over the past 20 years, have delivered an average return of approximately 14%/year (after fees). Cars, on average, depreciate by approximately 17%/year. Past returns do not guarantee future returns, but it is pretty clear which decision is better for your long-term financial health. If you have existing investments, then you should consider increasing your current contributions.

Governments generally offer generous tax incentives to people saving for retirement. Find out more and try to take full advantage of these incentives.

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