“The essence of finance is time travel. Saving is about moving resources from the present into the future. Financing is about moving resources from the future into the present.” – Matt Levine, Financial Journalist
One of my favorite movies is Back to the Future. The movie is about Marty McFly (Michael J. Fox), an average American teenager living in a typical American small town in 1985. Marty’s ordinary and boring life changes drastically late one night when he helps the local mad scientist, Dr. Emmett (Doc) Brown (Christopher Lloyd) perform a time travel experiment and suddenly finds himself transported back to the year 1955.
It is a great fish-out-of-water story with numerous twists and turns. In the process Marty accidently prevents his parents from falling in love and thus puts his own future in jeopardy. When Marty travels back in time he has a picture of himself and his siblings in his wallet. When it looks doubtful that his parents are going to fall in love Marty’s older brother starts fading out of the picture. His sister, and eventually Marty, also start disappearing.
Doc explains this is because when he prevented his parents from falling in love he broke the space-time continuum. Unless Marty can get his parents to fall in love, thus repairing the space-time continuum, there will be no future for him. Marty, with the help of a younger Doc Brown, must help his parents fall in love and get himself back to 1985.
The point of the movie, if there is a point other than fun, is that time travel would be an interesting and powerful tool, but also a dangerous undertaking with possibly catastrophic unintended consequences. Therefore, it should only be used with extreme care.
Financial Time Travel
While physical time travel is still only fantasy financial time travel is a reality. Modern finance provides us the necessary tools to send money to our future selves through saving and investing and to send money from our future selves back to the present through borrowing.
Like physical time travel, financial time travel is a powerful tool. When used wisely it can help us smooth consumption over our lifetimes, making it possible for us to treat all versions of ourselves fairly.
Financial time travel can also have serious negative consequences if we use it unwisely. If we damage the money-time continuum by sending too many resources to one particular version of ourselves (usually the present one) other versions will start to fade from the picture. Therefore, we need to plan carefully before sending our money off on time traveling adventures.
Sending Money into the Future
At the start of Back to the Future the adult George McFly, Marty’s father, is getting bullied by Biff, his boss at work. George does not have any confidence and meekly takes the bullying without standing up for himself.
Biff’s bullying of George has apparently been going on for a long time. When Marty travels back to 1955 he finds Biff bullying George. As part of Marty’s plan to get his future parents to fall in love George stands up for himself and punches Biff. When Marty gets back to the future everything has changed for the better. His father now has the confidence he was previously lacking. That one decision to stand up for himself changed the course of his life.
It is difficult for many of us to give up present enjoyment to send money to our future selves but doing so can change everything. It can provide the security we need to weather storms and the confidence and resources we need to try new things.
In addition, with longer life spans, and thus longer retirements, sending sufficient resources into the future is a vital component of wise financial management. The picture of our retirement years will change drastically if we adequately prepare. With preparation new opportunities are open to us. Without preparation the possibilities fade.
A less common, but equally damaging, problem is sending too much money into the future. This causes your present self to fade while you prepare for a retirement of ease and luxury that might never happen.
Both of these extremes should be avoided. Instead, you should save enough to maintain your current standard of living throughout retirement, thus being fair to all versions of yourself.
Further Reading: How Much Do You Need to Save for Retirement?
Sending Money Back from the Future
Going in to debt, in a very real sense, is borrowing money from your future self. It is sometimes necessary but should never be taken lightly. Borrow too much, or for the wrong reasons, and you will damage the money-time continuum and your future self will start to fade just as surely as the picture of Marty McFly in the movie. Here are some time traveling guidelines for some common types of debt:
Home Loans: If you are making a decent middle-class income your present self should not have to wait fifteen or twenty years for you to save enough to pay cash for a house. Borrowing a sensible amount for a modest home is a reasonable sacrifice to ask of your future self, especially since the future you will also benefit from the house. In this case going into debt can be a wise choice and we should be glad that modern finance provides us the tools to do so.
Further Reading: How Much Should You Borrow for a Home?
Student Loans: The future you will benefit in higher salary and in many other ways from educating the current you. So again, asking the future you to share in the cost of an education is a reasonable request.
This doesn’t give you permission to borrow any amount of money you desire for any degree that sounds interesting. The future you would appreciate a clear-headed decision about what to study and where to go to school, taking into account how this will change your future earning potential and your ability to pay off the loan in the future while still enjoying life.
The future you would also appreciate some sacrifice by the current you to limit the amount of money he or she needs to send from the future. This might entail saving in advance and working while you are in school. Don’t put the future you in the position of the doctor who lamented, “I lived like a doctor while I was in medical school, and now that I am a doctor I am living like a student to pay off my loans.”
Cars: Your future self is not going to be happy sending money back from the future to pay more than you can afford for your “dream car.” After all, by the time the future you sits in the driver’s seat it will be nothing but a used car in need of repair, but still not paid for.
In fact, treating your future self like that might cause him or her to travel back to the present to wrap you a few times on the top of your head with his knuckles while saying, “Hello! Hello! Anyone home. Think McFly. Think!”
The irony is that the future you, indignant at being treated so badly, is likely to repeat the mistake by trading in the once-upon-a-time dream car for a newer, more expensive dream car, thus passing the misery on to another version of you and compounding the mistake. Do this several times in your life and you have destroyed a lot of potential wealth.
A better plan is to consider the future you in your decision on what to drive and how much to spend. After all, it is really not fair to ask him or her to sacrifice so much for something they won’t to get enjoy.
There is one exception to this rule. If you can find a DeLorean that is also a time machine, spend whatever is necessary to acquire it. Trust me on this one; the future you won’t mind.
Credit Card Debt: Nothing will cause the future you to fade from the picture faster than forcing him or her to send money from back from the future to pay for credit card and other high-interest debt. Therefore, credit card debt should be avoided at all costs.
In fact, when legendary investor Warren Buffett had the chance to speak to a group of high school students he didn’t give them any investment advice. Instead he instructed them to “Avoid credit cards. Just forget about them.” His reasoning was that if the future you has to send money back to the past to take care of high-interest credit card debt he or she will never have any money to save or invest.
In the movie when the time traveling Marty McFly interrupted his parents’ relationship, putting his very future in jeopardy, getting them to fall in love was his number one priority. That, and getting himself back to the future, were the only things that mattered. Avoiding credit card debt, or paying it off if you already have it, is equally urgent for the financial welfare of the future you. Financially this is your number one priority. The future you is depending on it.
Financial time travel is a fact of modern life and can be a wonderful tool if you use it wisely. The key is to try and treat your present self and all versions of your future self fairly; you shouldn’t lavish undue resources or require excessive sacrifice of any of them. This will give you the best chance of having a fulfilling present and an exciting future, whatever lies ahead.
Hopefully your future will be as exciting as Marty’s, where at the end of the movie Doc, Marty, and Marty’s girlfriend Jennifer take off to the future, with Doc proclaiming as the DeLorean takes off into the air “Roads? Where we’re going we don’t need roads.” Happy financial time traveling!