Would I Rather Have Something Worth $5,000 Today Or $50,000 When I Retire?

This article first appeared on LinkedIn and is republished with the author’s permission.

I was recently invited by General Assembly to share my perspective on how to save money and to budget for expenses. While it was a really good discussion, there really wasn’t nearly enough time to dive deeper into many topics.

One of the topics I wanted to expand on was how I think of the money that I spend today.

Spending Today VS Spending Tomorrow

I’m not sure if this is unique to me, and I doubt it is.

Personally, there are just two points in time I will ever be spending my money – either today or tomorrow (when I retire). Stretching this point, any money that we spend today, we are actually snatching out of the hands of our future selves, to spend during their (our) retirement.

Spending On Non-Negotiables

Before going into specifics, we first need to be well-grounded in budgeting. During the session, the other panelists, Philipp from StashAway and Jacqueline from Seedly, reiterated the importance of tracking our expenses each month. They, and I, doggedly tracked this since we started working.

Doing this, we will understand that there are just some expenses we cannot run away from to live in Singapore. Even without tracking our expenses, we should know this. By tracking it, we just know more accurately what this figure is.

Let’s call this the non-negotiable expenses. Every month, we need to spend on our phone bills, buy groceries, pay for utilities, to take the public transport to work, to eat lunch, to expand our network and many, many other things we cannot go without.

While there’s limited room to cut back on these types of expenses, we can still look at what our grocery bill actually looks like – are we buying things on impulse? Soft drinks? Chips? Can we buy housebrands instead?

We can look at our phone bill and ask if we can optimize on a less costly plan, using a SIM-only plan while prolonging the usage of our older model phones.

Are we using the right electricity plans?

You get the point, even for our non-negotiables, there’s room to optimize.

Gradually, after becoming very familiar with the non-negotiable monthly expenses I have to fork out on each month, I stopped tracking every dollar going out. This doesn’t mean I stopped caring about it, I just knew what the figure was, and as long as I continue a similar spending pattern and lifestyle, I know this figure will be within a certain range.

What about the money we can use at our discretion?

Putting Aside Money For Tomorrow (Our Retirement)

Anything we don’t spend today can be put aside for our retirement at some point in the future. In the same token, anything we spend today, we’re taking out of the hands of our older, and potentially more financially-vulnerable self, in the future.

We don’t know what the future has in store for us, so we should be extra prudent about it. There’s a good chance our future, older selves may really need the money that our current selves are so frivolously spending today.

One example I brought up during the panel discussion is debating a replacement engagement ring for my wife. It’s going to cost a few thousand dollars to replace the ring she, unfortunately, lost recently. It’s a lot of money, but at the same time, we should be able to dip into our reserves to spend that amount.

For this argument’s sake, let’s say the ring we’re looking at is $5,000. It’s obviously not a non-negotiable expense. It’s also an amount we have in the bank.

By spending this money today, we are also choosing to not invest it. Earlier, I mentioned that we can only spend in two periods – today and during our retirement. This means we will have a nice diamond ring during our retirement, but we won’t have the $5,000.

Hang on a second, it’s not just about the $5,000. We can actually earn a good return over the long term by investing in. I’m 33 this year, and going by current government recommendations, should be retiring only at 65 to 70, in about 30 to 40 years’ time.

This translates into an investment horizon of 32 years. If I am able to earn a return of 6% per annum in the stock markets, which has traditionally shown to be very achievable over the long-term, I would have a lot more than $5,000 in the future.

[After feedback from a LinkedIn contact, I realise it may be valuable to provide a point of reference for the annual returns. Since 2002, Singapore’ STI ETF has provided an annualised return of 6.77%. The S&P500 ETF, comprising the largest companies in the US, has provided 9.71% per annum since 1993.)

How much?

By 73, the $5,000 would have compounded into over 10x the initial amount. Would my 73-year-old self, who has very likely stopped working, rather have the financial security of $51,400 or a diamond ring?

Isn’t Life About Living It Too?

Of course, we also discussed the fact that life is about living, and not just saving every dollar and making ourselves miserable in doing so.

Some things I do spend more money on than I should is on things that improve my life. For me, this is a good pair of running shoes, that support my knees during my jogs. A good bed, where we spend a third of our lives (or should be anyway) to ensure I get a good rest and don’t develop health issues. I spend on an annual holiday, to refresh myself and explore the world.

Ultimately, we all need to decide what “living life” means to us as individuals. No two people would have the exact same definition.

To keep yourself accountable, the simple question to ask before spending is “would I rather have this thing worth $X now, or would my 60 or 70 year old self rather have $10X?”

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