A popular notion, particularly among the young, is that you should ‘enjoy life now’ and ‘live in the moment’. I agree — worrying about the future or dwelling on the past distracts us from enjoying the present.
But there’s a problem: living by that principle will make you keep spending all the money you earn.
Let me explain why.
One of the basic concepts in economics is scarcity. We have limited resources and unlimited wants, and the things we desire are scarce. This means we must decide how to allocate our resources to get the most satisfaction from the goods and services available. Scarcity forces us to make choices.
The important assumption here is that our wants are endless.
Remember what happened the last time you got a pay raise? You probably started buying slightly nicer clothes, choosing slightly better hotels for vacations, or maybe decided to get a car loan. The next smartphone, TV, or fridge you bought was likely BIGGER and BETTER than the one you had before.
This behaviour is particularly dangerous when people spend their entire paychecks during their prime earning years, precisely when they should be saving to cover gaps later in life. According to the life cycle theory, income doesn’t stay the same throughout our lives — it’s low at the start of our careers, then typically peaks around age 45, and begins to decline as we get older. Note that the peak is well before retirement age.
Therefore, the idea of living in the present moment is flawed from a financial perspective because we never get enough and try to satisfy our limitless desires using all the resources (i.e., money) available to us. And it has the most negative impact on our wealth when earnings are at their highest.
What’s the solution, then?
We need to limit the amount of discretionary income — income that’s left after all necessities are paid.
A simple thing you can implement right now is to start allocating a fixed share of your monthly income to savings, say 10%. This won’t affect your quality of life, and you can always adjust the percentage up or down later. How to preserve this money so it doesn’t lose value is another topic, but don’t worry about that at the start. The key is to build the habit of saving.
Even having a mortgage can work as a forced saving mechanism. Despite paying interest, it essentially allocates money away from discretionary spending and builds equity over time.
But on a broader level, you need a long-term strategy to balance current and future consumption, which is the essence of financial planning. Learning basic personal finance principles can help develop the right mindset, such as budgeting, living on less than you make, reducing debt, and building an emergency fund.
The goal is to master living in the present that your future self will be grateful for.
