Last week I wrote about 2 young men who are living very different lifestyles. One is frugal now and is saving substantial sums of money and the other is living for the day with the assumption that when he gets married and settles down, there will be plenty of time for saving later. As I was writing it, I was reminded of the epic tortoise v. hare race. In the blog post, I raised some questions about the lifestyles and choices that these men are making. Some of those questions are at the very heart of the field of behavioral finance and some of the questions could lead some of us to “judge” the choices that they are making. This is where understanding each guy and how they are “hardwired” regarding financial decisions can be helpful.
Is the first guy sacrificing fun and memories today in order to prepare for a future in a very uncertain economic climate? To the outside observer, the answer to this might be yes. I asked him this very question, and he was emphatic that while he isn’t spending a lot of money on material goods, he is making amazing memories with his good friends and his family. They go to a lot of state parks, hiking/biking trails and local beaches, and it sounds like they have a tremendously fun time at low cost. He laughed and said that he actually DOES spend money, but before a trip, they pack a bunch of food & drinks to keep the cost of the trip low. By doing this, he says he is creating sound financial habits, enjoying the things that matter to him today, and building a substantial financial future all at the same time. I think he has his financial life figured out!
Is the second guy getting himself so far behind the curve financially now that he will have no choice but to work until he’s 70? I asked him this question, and he was equally as sure of his position as the first gentleman. He said that he has seen several of his friends die young and many of his male family members die in their late 50’s. So, he is operating under the assumption that his time on Earth is limited and he is going to enjoy every single day. He also plans to get married one day and fully expects that his wife will work, so they will have 2 incomes but if they live in his house, they will not see an uptick in living expenses. Plus, he expects his income to grow substantially in the coming years. So, while he says he is living at the very margin of what he can afford today, he anticipates more income later from marriage and from job growth. At that point, he will be aggressive in debt pay down and long term savings. He had a very logical, well reasoned, passionate explanation for why his financial life is configured as it is today. I think he has his financial life figured out!
What role does lifestyle choice (spending vs. saving) have in determining your long term success? This is a big question and while the answer may seem easy (it has A LOT to do with your success), lifestyle choices are only one portion of your success factor. Health is a major factor! The 2nd guy’s thought process included a short life span because of family genetics. Future earning capacity is a big factor, and for those who plan to continue to expand their knowledge base, work hard and climb up the income ladder, it’s possible to earn your way into a great financial position. Marital status can be a factor as well. Getting and staying married is an indicator of success, while divorce can obliterate one’s financial life. So while spending vs. saving plays a central role, there are many other factors at play.
Is either guy right? Is either guy wrong? That’s the great part about financial planning and managing finances. There are many ways to be right and just a few ways to be wrong. In both cases, the guys are doing things that make sense to them, they are not being irresponsible, and they have a vision for what success looks like. I think they are BOTH right! They are making good choices based on their vision, their goals, and their own unique measures of success.
So while last week’s blog post may have seemed like I was judging and saying the one guy’s path was superior to the other guy’s path, this is not the lesson that I learned. What I learned is that both of these very bright young men have their financial lives well in hand and I expect to hear nothing but success from both of them. There are many ways to reach a place of financial security and through very different paths I believe that both of these guys will get there. They are both right!