Thank your past self, and put away 10%
Nothing gets you thinking about your financial future more than working at a FinTech company, whats more, a company that is focused on climate change and corporate sustainability.
At Corporate Knights, we are developing tools that help investors mobilize their capital to invest in companies that align with their values without sacrificing financial returns.
And this has all got me thinking, what is the best financial advice I have ever received.
It’s a sweltering hot Friday afternoon in downtown Toronto, and I am anxiously awaiting the end of the first week of my dream summer internship at an advertising agency. My thoughts are conflicted as I consider both a looming project deadline, and my plans to beat the heat with some friends at a nearby patio. A fresh paycheck sits on the edge of my desk, ink still wet from the printer. It’s begging to be spent.
Suddenly an email appeared in my inbox. Each week, the agency President would forward a timely or controversial comment, and each week I would send these messages directly to the trash bin to avoid my inbox becoming too cluttered. On that particular day, I took the time to read the message and I am eternally thankful for the financial wisdom that it contained.
I had graduated in the spring from Queens in applied economics. The world was full of endless possibilities. I wanted to start living, and suddenly I was confronted with information that was hard to process. On reflection, it was the smartest thing I learned.
In the message, the president detailed the “changing nature of industry”: the growing client demands for viral content, the razor thin production budgets, the tightrope of work life balance, and the excessive job hopping of young creatives and account managers. All I could see at that moment were reasons that companies used to rationalize the elimination of benefits. I was being told that ad agencies (as well as a growing number of employers) could no longer consider providing transportation allowances, health benefits, and most important of all, pension savings. He was shifting those responsibilities to his employees. Therefore, he concluded, “you must put at least 10% of your monthly paycheck away for savings, you will thank yourself later”. Looking down at my paycheck I had to consider- cold pitchers of beer? new summer clothes? monthly contributions to an RRSP? “What’s an RRSP?”, I asked myself.
Someone was telling me I had to save on my own.
The first concepts I was taught in my first-year finance class were the concepts of the time value of money and the discount rate. A dollar today is worth more than a dollar tomorrow. This meant my bi-weekly paychecks rolling in were far better spent on my bar tab today than sitting in a bank account earning mere pennies in a savings account.
I realize that this concept contributes to young people thinking; why save for tomorrow when you can spend today? If they compound the concept of the time value of money with the numerous studies in behavioural economics surrounding hyperbolic discounting, what seems to be happening is that people are increasingly choosing a smaller “sooner” reward over a larger “later” reward. Not only are dollars today worth more, people also psychologically feel better spending today than waiting for a larger payout tomorrow. And people wonder why the Canadian personal savings rate is a lowly 5.8%.
Personal finance writer Matt Levin eloquently stated that the essence of finance is time travel. “Savings is about moving resources from the past into the future”, he says. Behavioural insights show us that our mind plays tricks on us. It misguides us into heavily discounting the future and favouring the present. But we must fight back. Because the future is creeping up on us every single day. We dream about moving out of our parent’s basements. We never consider the impact of a car accident, or how to survive if we are laid off from a job. It won’t happen to me, you might say.
Savings is time traveling gift, from you, to you. It supports your future dreams and aspirations. Sometimes it protects you against your mistakes, but more often it is there to lift you to new heights, and 10% is the least you can do for your future self.