We sometimes think about our future self as a different person. Of course, we know this is not actually true. But when it comes to borrowing money, thinking of our future self is important.
When we borrow money, we say we are borrowing from the bank, or from a car finance company. But actually, we’re borrowing from our future self. What we mean is that you might borrow money from NAB to pay off a new car, but NAB isn’t paying the money back for you – you are. NAB is simply the middleman allowing you to carry out the transaction. In 10 years’ time, you will still be the same person, just older (and maybe with a few more grey hairs!) – and it’ll be you paying off your own loans.
So every time you borrow money, you should think about it as borrowing from yourself.
Essentially, you need to work out whether spending the money now is worth it for your future self. If you buy a home, although you may be paying it off over the next 20 years, you are getting a home now in which you and your family can live. That kind of expense you can probably justify and your future self won’t mind too much about paying it off.
However, if you choose to buy a luxury item such as a top-of-the-range jet ski, and end up paying $100 a week for the next 5 years, think about what that could equate to in the future – that is, what that money could be doing elsewhere.
We aren’t telling you what to buy and what not to buy, we’re just saying to ask the question: will my future self be happy about paying this off?
In the case of the jet ski, it might be fun to use now, but we also know that that $100 a week could have grown to $100,000 in super over ten years or so.
We don’t decide which items are worth buying and which aren’t – that’s completely your decision. But we do make recommendations based on what we believe are good investments. Recently we saw a couple who had paid off their home loan early, and we helped them to borrow $100,000 against their loan in order to invest in the top companies in Australia via the share market. In this instance, their future selves would have to pay back the loan, but in the meantime those companies will have accumulated interest and will be worth a lot more than they were bought for. This is like the home example – it’s an investment that you make now, that you’ll be paying off in the future, but one which your future self will (hopefully) not come to regret.
Sometimes it can be difficult to determine what you may or may not regret as your future self. Take Michael as an example – at 3 years of age, he would throw a tantrum every time his mother walked him past the lolly aisle. She would do that thing mothers do, and talk to him through clenched teeth from the side of her mouth, telling him to be quiet, and what would happen at home if he didn’t stop making a scene. Of course, to 3-year-old Michael, getting home seemed like 20 years away – he couldn’t care less about his future self – until he actually got home. He just wanted a lolly now. Of course, as soon as he got home, he quickly grew to regret that decision!
So, when it comes to making decisions about your future self, just ask the question of whether that future self would be happy about paying off a debt for something you wanted in the past. Hopefully with a bit more insight than a 3-year-old you’ll be able to work out if it’s worth it or not! And just remember, you’re never borrowing from your bank, or your car dealership; you’re borrowing from your future self.
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Dallas Davison, Michael Hogue and Ali Hogue.