Sunday, February 17, 2013

"In the long run..."


From my friend's Facebook post

Dear Investor Juan,

I am so lucky to have stumbled upon your blog and its very informative especially for a newbie investor like me. I was so amazed with your excel presentation regarding the amounts you needed to earn once you decide to go back to workforce and have a family.. I myself just got married, albeit no child yet.. I have a question and i hope you can share your thoughts.

I've been reading anything about investing and I always encounter the concept of delaying gratification so as to save in order to invest. Is this concept equivalent to being frugal or is it the extreme end of it? My problem is how do you remain faithful in investing for the future without necessarily sacrificing providing some sort of leisure to your wife or children? Ang hirap kasi mag budget ng pera lalo kung maliit :-) ang sweldo hehehe. I was just thinking whats the point of having lots of money many years in the future eh hindi naman natin hawak ang buhay natin, pano kung di ka na gumising bukas so hindi mo rin naenjoy ang pinaghirapan mo? Am i making sense here, I don't know please enlighten me with your wisdom.. How can I strike a balance with providing a quality life for my family in the present vis a vis securing the future? Thank you and Godbless!


Dear Anonymous,

First, thank you for asking the "right" questions, and for getting it, for seeing the "big picture."

I was just thinking whats the point of having lots of money many years in the future eh hindi naman natin hawak ang buhay natin, pano kung di ka na gumising bukas so hindi mo rin naenjoy ang pinaghirapan mo?

What's the point, indeed?

To answer this question, we need to understand what "saving" really is--postponement of spending and consumption to a later date. I mean, what else do we do with what we save now but spend it later? But why do we even have to save a portion of our earnings, why can't we just spend our money as soon as we get it? The "need" to save arises primarily because we are not sure what's going to happen in the future, both in terms of how much money we'll need and how much we'll be able to earn: a family member might get sick, we might lose our job, we might need to buy a new car. In such cases, saving becomes the easiest way to deal with uncertainty and risk.

It's easy to see how one extreme of the consumption-savings trade-off--spending all your money as soon as you earn it--has become the poster child of financial literacy advocacy. It has come to represent unflattering virtues such as conspicuous consumption, materialism, greed, and myopia. And while I'll be the first to say that indeed, it is a problem that needs to be addressed (one of the reasons why this blog exists, right?), I also say that we need to be just as concerned with the other extreme.

If you took that financial planning course from Coursera, you might remember one of the Week 1 modules saying how there's no such thing as "saver's remorse" (as opposed to "spender's remorse"). To this I say: NO, saver's remorse is real because saving involves giving something up, something that may not be very valuable to one person but worth a lot to another. We all know that it's important to be better prepared for the future and that planning, saving, and investing are some of the means to achieve that end--isn't that why we are all here for? But I think that many of us on the financial literacy bandwagon forget that it's also important to be able to live a "good" quality of life (however you want to define it) now while we're still alive. After all, the point of all that we do is to have a happy, contented, and comfortable life, not just now and not just in the future, but throughout our and our loved ones' lives. Isn't it?

My point is that living on either extreme of the consumption-savings are equally "bad," that spending your income all at once is just as bad as being a miser (there's a reason why the word shares a lot with "miserable"). The "sweet spot" then must lie somewhere in the middle; unfortunately, unless we know exactly what's going to happen in the future, it's impossible to find this perfect mix. Given the uncertainty, the best we can do is to avoid the extremes, plan with whatever information we have, and cross our fingers that the die rolls in our favor.

I've discussed some ways that can help achieve this balance throughout this blog, one of which is the financial planning post that you mentioned. Apart from these, I offer the following loose guidelines that can further help us along the way.

1. Live within your means. Choose a lifestyle that you can sustain with your earnings. In my personal experience, your chosen lifestyle can have as much impact to your "happiness" as how much you earn. If you find your credit card balance increasing from month to month, or you find it hard to reduce it by a significant amount, then you're living beyond your means. If you want a more luxurious or extravagant lifestyle, then find a better job or get an additional source of income.

2. Prioritize building your emergency fund and get insured. Get these taken care of as soon as you can; once you do, the need to save lessens dramatically.

3. Allocate some of your resources for leisure and other "life-enjoyment" activities. As soon as you are sufficiently protected from risk (see Number 2 above), you now have more freedom to use you excess earnings as you wish. In past posts such as this one, I've talked about how at this point you can now afford to invest in riskier assets with the promise of boosting your income. What I failed to emphasize is that you should use some of your excess income to give yourself and your family a good quality of life.

I end with two things from John Maynard Keynes. First, if you have time you might want to read his 1930 essay "Economic Possibilities for our Grandchildren" where he discusses the importance of leisure and the quest for the "good life." And second, I quote something from Keynes, what I think he would have told you if you asked him your questions:

"In the long run, we are all dead."

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