Have you ever thought about what you want your lifestyle to look like over your lifetime? We all want our lifestyle to rocket upward in our imaginations, but, realistically, what do you plan your spending to look like? What if you were to plot it on a chart? Here’s what most people would draw? It would look a little something like this:
So, this sketch shows that lifestyle starts out lower and quickly increases. Over time the slope reduces so that lifestyle levels off. Near the end of a lifetime the lifestyle reduces slightly to reflect the reduction in spending as a person ages. You’ll note that it doesn’t drop off precipitously, since much of the reduction in spending is made up for by increases in health care related expenses.
Now, let’s think about this curve in light of borrowing money to increase lifestyle. When you borrow money (this is important, pay attention here), you shift the consumption forward in time, and are obligated to pay for that lifestyle later. That means that your lifestyle will artificially rise through borrowing earlier in the life cycle, and that your lifestyle will have to be reduced later to fulfill the obligation. Here’s a sketch of the idea:
There’s a spike in lifestyle at the beginning, and then, in order to take care of the obligation created by borrowing, there is a reduction in lifestyle. This is (among other reasons) why us financial planning types keep telling people to not spend so much on their credit cards. Credit card spending can artificially inflate lifestyle early in life, and then it can require a significant reduction in lifestyle later in life to remove the obligation.
Finally, let’s take a look at the curve of someone who fails to save for retirement.
So, lifestyle is higher, younger. Except when old age hits, there’s nothing to support the continued lifestyle spending, aside from Social Security, or (if they’re lucky) a pension.
So, here’s the moral of the story. You have a tremendous amount of control over the timing of your consumption. Perhaps you could consider smoothing that curve for your future comfort?