Spending Today Vs Saving For Tomorrow

Are you a saver or a spender?  That’s the question asked every week to celebrities and successful entrepreneurs on the last page of the Sunday Times Money section, giving us a brief insight into the financial habits of the rich and famous.

I’ve always considered myself to be a bit of a saver (especially since I started learning the basic rules of personal finance, such as emergency funds, the cost of debt and compound interest), so I’ve generally being open to things like retirement planning and putting some money aside for a rainy day.

However I still find it very difficult trying to balance the needs of today against those of tomorrow.

Spending Today

Even the most frugal person has to spend money on the bare necessities, such as food, commuting, rent / mortgages, heating and clothing.  Then there are the costs of socialising – spending time with your friends or partner, going on holidays, attending weddings and other family occasions.

I guess anyone who has children will have even more costs to contend with and then there is always the odd emergency situation in the home or with the car that saps your savings away.

With so much money going out of the door, it is often hard for people to keep their heads above the water on a day-to-day basis, let alone think about their future retirement needs or paying for their children to go to university.

Saving For Tomorrow

If I have not already depressed you enough with money issues happening today, a quick peek into the future might just send you over the edge!

In 30 or 40 years time the following scenarios may well be taking place:

• A growing world population and international competition from the newly-rich countries in the Far East and South America will increase demand for both food and raw materials, significantly raising the price of nearly all the products we need to buy
• The ageing UK population will result in a significantly lower tax income to the government, resulting in increased taxes for the general population and less public services like education, health care and state pensions
• Long periods of recession, will prevent a number of people from generating sufficient income to maintain a comfortable standard of living and the gap between the rich and poor will widen

A pretty grim picture by all accounts, but remember these are only potential future scenarios and nobody can say what will actually happen in the future.  The point I am making here is that it makes sense to put in place plans for dealing with worst-case scenarios like the ones above.

So how would you plan for a future of significantly rising costs and tax, with a greater risk of unemployment?  Here are some potential approaches:

Trim The Fat

Get into the habit of constantly finding ways to reduce your monthly spend.  The Money Saving Challenge is designed to help people identify £250 of savings from their monthly outgoings (which by the way, does not involve you living like a hermit on a diet of baked beans for the rest of your life!).

Annihilate Debt

Pay off all your debts and avoid taking on new debts, unless it is a mortgage that you can genuinely afford.  The following posts will help you decide on an effective debt repayment strategy:

• Three Step Approach to Clear Your Debt
• How I Paid Off My £6,000 Debt in 14 Months
• Mortgage Over-Payments: Should I Pay-Off My Mortgage or Focus on Saving?

Save, Save, Save

With your debts cleared, start building up savings to act as a buffer against the unknown.  Even if you can only stretch your budget to save £50.00 a month, it is better than nothing and you can always increase your savings as you begin to earn more money.  Read the Rules of Financial Freedom to find out about the power of small returns and why compound interest turbo boosts your wealth.

Also make sure you read about setting financial goals and achieving your savings goals.

Build Multiple Streams of Income

Don’t be dependant on just one source of income, instead find ways to build passive income and set up a sideline business.  The more you can earn from different sources of income, the less dependant you are on a standard job, giving you greater financial freedom to pursue other dreams and also protection in case of periods of illness or unemployment.

Consider Your Pension Fund As An Insurance Policy

Putting money into a pension fund is still a valid and tax efficient way to save for the future, but being totally reliant on one source of income when you retire is risky, so instead treat it as an insurance against having no income at all and look for other ways to bring in an income, such as buy-to-let property and a sideline business.

Also why should retirement be something you do towards the tail-end of your life?  In his book, The Four Working Week, Tim Ferriss talks about structuring your life so that you have minimum outgoings on both your time and finances, allowing you to take a number of mini-retirements either at home or abroad to learn new languages, skills or to help other people.

Click here to buy The 4-Hour Work Week: Escape the 9-5, Live Anywhere and Join the New Rich

Balancing Spending For Today And Spending For Tomorrow

As I say, finding the balance between spending and saving is tricky, especially when people have got so much going on in their lives and it is always easier to delay thinking about future issues, in order to focus on current problems.

One approach for achieving the balance is to mix short-term tactics with longer-term strategy.  Cutting costs and beginning to pay off debts are perfect short-term tactics to begin with, whilst taking some time out to plan for saving goals and incrementally growing your income streams will form part of a longer-term strategy.

And if retirement still feels too far away to worry about, why not plan for a mini-retirement to take place within the next couple of years.  This will give you a much shorter deadline to work towards and therefore keeps the saving and income stream growing goals firmly at the top of your priority list.

Photo courtesy of Alan Cleaver