Your current situation and your future are two different things. Saving money requires thinking ahead.
If you are in college right now, or are otherwise just starting out, this post is for you. I was just out of high school around the time this arrest photo of Bill Gates was taken, one of several arrests in the late 1970s. He was already successful, but probably had no idea of just how successful he would become. I wish my future self had come back to tell me where to put my money. You know, like the story where Biff hands you the sports almanac with all the future winning teams.
Realistically, the savings approach I did need to hear about in the 1970s was still fairly new – that was the concept of index investing. John Bogle founded the first retail index mutual fund, the Vanguard 500 Index Fund, in 1975. If only my father had told me that it was senseless to try and beat the stock market, and that all you needed to succeed was to “buy the market.” When I was a kid, I asked him if he had any stocks, and he told me he had dabbled in the stock of Exxon (then, I think it was Enco or Standard Oil), but that “as soon as I bought it, it went down, and as soon as I sold it went up.” He gave up on the stock market based on that experience.
If you are in college, or just starting out on your own for the first time, you are probably focused on other things, like paying the rent, or passing your classes. As my college-aged daughter tells me, your focus is on “your current situation,” not your future. I am going to say to you what I wished someone had told me in my late teens: start thinking ahead, and consciously consider your long terms goals in life, even when making everyday decisions.
It is not easy to do. If you are trying to pass a class or make rent, you do not want to consider other things. That just adds to the stress. But, what if you think about what happens when you pass the class (and ultimately graduate), what are you going to do then? What happens after you barely make the rent? Are you going to go through that pain every month? Perhaps you need to think more strategically about your working and living arrangements.
I am not saying you have to start saving money right now. What I am saying is that you should expand your thinking into a more integrated process that includes longer term planning. I would argue that all short term decisions should arise from longer term plans. Whether you made those long terms plans is an open question, but the impact of day-to-day decisions on your future is real. Here are some obvious examples: the decision to work or go to college, or the decision to obtain a student loan or go to college part-time while working full time. Some not-so-obvious ones: the decision to get an apartment yourself versus finding roommates, or the decision to take on a part time job as a full-time student. These not-so-obvious ones may arise from happenstance, but they should be deliberate decisions made in the context of your longer term plans.
What does this have to do with saving, then?
Longer term plans normally require resources exceeding your current wealth. When we are young, we have enormous human capital to spend, but we do not have much financial capital. Eventually (with age) you will be in the opposite situation, if you plan adequately. You will have less human capital available, but you will have accumulated enough financial capital to accomplish your plans. You don’t have any plans? If you do not make them, then life will make them for you. Are you planning to have children? Are you planning to marry, and if so with a working or non-working spouse? Are your children on their own for financing college? Are you saving for your future retirement?
Each decision has a consequence, and each consequence triggers each decision you make every day. You can either seize control of those decisions, or life will do it for you. If you do the latter, you have only yourself to blame for the consequences.
I wish my father had told me these things…but I sure as hell am telling it to my daughter.