Article by Marcel LeBlanc for the Times & Transcript January 17, 2019

Have you ever wondered why it’s easy to convince yourself you deserve a trip every year yet it’s hard to bring yourself to increase your retirement savings? There’s a fairly simple economic model that is used to explain our preference in relation to consumption and savings over the course of our lives. This model can help explain why we make the choices we make and why we’re naturally inclined to make decisions that can hurt our financial success.

In economics, the Intertemporal Consumption Model is a way of explaining our preferences for certain events at different points in time. The forces behind this concept represent a large part of what makes up our spending and saving patterns over time. In this model, Discounted Utility is used to measure the desirability of some future event as perceived at the present time compared to the actual time of its occurrence. This influences how we perceive the worth of something now compared to later. It’s one of the main reasons the cards are stacked against us when it comes to debt repayment, retirement planning, and other financial goals. It’s why we often spend more than we should and save less than we could.

The model explains that, in the case of desirable events, the more time there is between now and the event, the more we discount its desirability. For example, taking a trip to Mexico today is more desirable than the exact same trip one year from now. Even if we haven’t saved up for it and this new debt payment will impact our ability to save, we will be tempted to book it now. Since the gap between now and the future date erodes the event’s desirability, it influences our willingness to wait, even if doing it now will be more costly and negatively impact our financial situation. This logic applies to most areas of consumption and spending such as travel, home improvements, as well as most desirable events in your life.

I would argue that this model also applies to things we view as unpleasant. We discount the pain of things we don’t want to do in the same way we discount the desirability of things we want to do. If we feel that increasing our savings today will be hard, we are likely to believe that it will be easier 5 years from now. Therefore, not only are we more likely to spend on desirable things today but we will procrastinate on unpleasant things regardless of the logical consequences or benefits. In this cycle, we overspend and delay saving.   

There are three components to accumulating wealth through investments: contribution amounts, time invested, and rates of return. Discounted Utility influences two of three components (contributions and time). Investors often get so preoccupied with market returns and volatility when in fact procrastination and reluctance to increase contributions will have a bigger impact on their overall results. Since this model significantly impacts our ability to build enough retirement savings, it’s worth taking steps to curb its influence on our success.

If you find it difficult to get out of debt or save more, this concept may very well be the main culprit. For your best chance of success, start by recognizing where this concept might be impacting your own spending and saving patterns and consider making changes where needed. If you believe it’s unlikely that you will have the discipline to make changes, it might be best to seek out the help of a qualified advisor. A competent advisor can hold you accountable to your goals, act as a voice of reason, and keep you focused on living a balanced lifestyle so you can live a great life today and tomorrow.