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Temporal Discounting

Posted by Brad Bridgewater on Jun 10, 2016 2:19:32 PM
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temporal-discountingCarpe diem: seize the day.  Many take this to mean they should live in the moment, let go of the past, and let the future worry about itself. In the financial world, this mindset takes the form of temporal discounting.

Temporal discounting is the tendency for people to put a greater value on what is happening in the moment, and discount the value of their past and future. When you fail to properly value your future retirement, you are less likely to do what you must to save in the present. You incur debt and make payments on luxury items because you can afford them now, rather than preparing to live comfortably later on with your savings and investment income. On top of that, financial planning done right affords a person the control to call their own shots and end their career on their own time rather than being shown the door.

Carson Palmer: A Lesson in Planning Ahead

It can be easy for crewmembers to want to indulge. You travel constantly, and you want something special at home to help justify your hard work in the present. Your income probably makes most of these items easy to acquire: large houses filled with expensive things, expensive cars that begin to devalue as you drive off the lot, overly expensive hobbies, etc. However, spending your extra income now discounts the value of your retirement, when you will need the money and the investment returns you could be getting in the future more than you need those items in the present.

One great example of the benefit of valuing your future equally to how you value your present comes from the world of professional football. In 2003, Carson Palmer was the top draft pick in the NFL. He signed a huge first contract worth millions, a windfall that sends many in similar positions on a spending spree. While many of his teammates bought Ferraris and mansions, Palmer bought a Chevy Tahoe and a nice home in the Cincinnati suburbs — then saved and invested his extra money. He bought what he needed, but placed a greater value on his later years and the power of being wealthy rather than having stuff.

In 2011, Palmer wanted a trade from the Cincinnati Bengals. He threatened to sit out the season or even retire, and the Bengals attempted to call his bluff. Because Palmer had valued his future properly, though, he wasn’t bluffing; he was financially secure and prepared to not play rather than play for a team that was not a fit for him. Eventually, the team acquiesced and traded Palmer to the Raiders, and he continues to play football today for the Arizona Cardinals. Palmer has the financial power to control his destiny and call the shots in his career and retirement.

Preparing for Your Future

Although crewmembers do not work under the multi-million dollar contract that a star NFL quarterback earns, this does not make Palmer's experience less valid for you. In fact, it means you need to do more to value your future needs. You can afford a comfortable lifestyle that gives you what you need now, while still saving for your future. Do not discount the value of life after your last flight; your present savings and investment vehicles will determine when and how comfortably you can retire.

It’s never too early or too late to prepare for your financial future. Request a complimentary consultation with Retirement Advisors of America today to begin planning for the retirement you desire.

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Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by Retirement Advisors of America following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, Retirement Advisors of America accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security. 

Topics: Financial Planning