"Buy now, pay later," is nothing new. Many people follow this habit, the justification being that they'll earn more money in the future and make up for their overspending then. The Simple Dollar's Trent Hamm argues against this concept, saying it's based on a "perfect future self."
Hamm refers to an economic concept called "Consumption Smoothing." Then, he points out why it's not a good idea:
"In a nutshell, Consumption smoothing means balancing out spending and saving to maintain the highest possible standard of living over the course of one's life...consumption smoothing buys into what I consider the most dangerous concept in personal finance – the idea of the "perfect future self."
Hamm says we like to envision a future version of ourselves—someone who is financially successful and makes rational decisions. It's tempting to buy into the idea that our responsible and rich "future self" will take care of our spending today.
But this isn't realistic. Hamm points to two possible outcomes of this mindset:
- You do become perfect. But now, you can't get ahead, because you have to pay for your past mistakes.
- You remain the same, and/or an unforeseen event arises. You're in no position to take care of this event and/or your past spending. You're stuck in debt, and you don't have as many options.
He mentions that consumption smoothing might make sense in theory, but it doesn't account for the reality of life. Instead, living beyond your means today usually leads to burdening yourself tomorrow.
Hit the link to read more about his thoughts on the matter.
Does Consumption Smoothing Really Work? | The Simple Dollar
Photo by k rupp.