My favorite Yahoo! Finance writer Laura Rowley recently wrote about whether it’s always necessary to live within your means.
A basic tenet of personal finance is to live within your means – spend less than you earn. By following this one simple rule, you’re saving for the future and putting yourself in good position.
The question Laura tries to answer is why we have to live like college students now only to splurge when we’re older. Can’t we achieve the balance we’re looking for?
The conclusion Laura comes to is that we should live within our means except when it’s smart to borrow. The economist in the story says that we should have a spend now mentality because living without our means has no economic foundation.
While this can definitely work for some people and balance is important in all our lives, this is a hard plan to put into action for most people. Hindsight is 20/20, but the future is hard to predict. Can we really be sure that we’ll be making that much more later in life? If we don’t have the surplus we expect, will we look back and be disappointed in our past decisions?
Another question I have is about the effects of compounding interest. Maybe one of the reasons people have a surplus of money when they’re older isn’t just related to their income but also to their savings. If we spend more money when we are young, then we will be putting less into savings (and in some cases borrowing more).
By losing years and years of compounding interest, won’t we have to save more later in life to make up for it? Suddenly we’ll have to be making larger 401(k) contributions and paying off a larger mortgage because we didn’t put down as large of a down payment.
This is a slippery slope in my mind. When you are in medical school and know that you will be making a lot a few years down the line, I think it’s ok to spend and enjoy life a little more. But if you’re a teacher, it’s much harder to see how the riches of tomorrow will be able to cover today’s expenses.
Readers, do you think we should spend more now because we’ll have more later? Or is it just setting ourselves up for trouble?