Based on an original series by Think, Save, Retire and continued by Our Next Life (the blog), I’m completing the “Our Next Life” series for Northern Expenditure. This means discussing the transition, the quitting, and the goals and plans for life after “work.” This is an interesting subject for me to tackle because instead of having super definitive plans, we’re sort of all over the place. But here’s where we’re at today:
Tag: early retirement
We’re going to throw around some terms today that will impress your friends at dinner parties. Get out your notepad. Today’s topic is intertemporal choice and temporal discounting. Intertemporal Choice is a term used when a choice involves making a decision at a certain time that will impact the outcomes at a different time. For example, remember the Marshmallow Study? It is an intertemporal choice to choose between taking one marshmallow now or waiting for the second marshmallow. Temporal Discounting simply means that we value the second marshmallow less than we value the one sitting in front of us because the one sitting on the table is here NOW and the other one is LATER. If I told you I would give you a dollar now or you could wait a week and get the same dollar, why would you wait a week? The dollar now is worth more. You could spend it on your way home (don’t. even though the dollar is fake). In one of the most obvious financial examples, it’s hard for people to save for retirement because they value the money now more than the money later.
Temporal discounting is a highly studied topic because it’s important for people to understand how much an individual will discount that future dollar (or marshmallow, or whatever) for the one today. (Would you trade a dollar today for FIVE dollars next week?) It’s also important to understand what factors into that discounting. (Do you trust me? Have you been raised on a family saying of “Take the money and run?”) This is one of my favorite topics (I reserve the right to share more research in this field at a later date… but because of temporal discounting, THIS post NOW is definitely worth more… I know. I’m hilarious.)
So what does the research say, and how can we learn from it?
My “go to” answer to any of my kids’ questions is always: science. Try it. It works for a lot of things. “Why is the sky blue?” Science. “Why can’t I eat cake every day?” Science. “How do the ghosts in Haunted Mansion at Disneyworld look so real?” Science. “How are babies made?” Science. If they want real answers, we usually look it up together online, check out a book at the library (I prefer visual aids included in my explanations), or I send them to Mr. T who has both endless patience and an endless trove of random facts to share (aglet = the plastic or metal thingy at the end of your shoelace. Didn’t know that? Mr. T says “you’re welcome”).
In terms of money, the answer is always: Math. How do I know how much to save for retirement? Math.
Actually, I changed my mind. The answer is always: Spend less. How do I know how much to save for retirement? Spend less. Let’s explain.