The past, present and future of personal finance

This post is from staff writer Richard Barrington.

When you think about money, are you primarily concerned with the past, the present or the future?

Living in the present is generally considered a healthy way to go through life, and this extends to personal finances as well. However, when it comes to personal finances, you can only consistently live in the present if you first take care of the demands of the past and the future.

The following are some thoughts on how finances need to get over the past and take care of the future so you can enjoy living in the present.

Paying off debt = living in the past

Let me make this clear from the start: when I equate paying off debt with living in the past, I am not being critical of people who honor their debt obligations. Honest people do everything they can to pay off their debts. The idea, though, is to get free of debt as soon as possible in life, because to some extent paying off debt keeps you mired in the past. It means you continue to be bound by decisions you made previously.

Unfortunately, many Americans feel trapped by the debt they’ve taken on. The baby boom generation — to which I belong — is largely to blame. Over the past 40 years, when baby boomers were in the prime of their careers, the total of consumer loans and credit card debt outstanding has ballooned from $166 billion to $2.77 trillion. Residential mortgage debt has mushroomed from $345 billion to $9.92 trillion.

As understandable as the urge for instant gratification is, the magnitude of these debts makes if very difficult for some people to ever escape their pasts. Sadly, the way student loan debt has escalated in recent years, we may be getting a new generation off to an even worse start.

Realistically, some borrowing is necessary for most of us, but here are some broad principles for keeping it under control:

1. Don’t borrow without a repayment plan. Whether it is a student loan, a credit card purchase, or a mortgage, you shouldn’t take on a debt unless you’ve budgeted for when and how you will pay it off.
2. Borrowing should not rise with your income. This phenomenon shows up in a number of ways — borrowing tends to rise when the economy is good. People take out bigger loans as they earn more money. The problem is, this just keeps people on the treadmill of debt longer. If you want to get off that treadmill, use raises to pay down existing debts, not as justification for taking on new ones.
3. Getting ahead of your repayment schedule if you can. If things are going well, don’t be limited by your original repayment schedule. You can reduce interest expenses and get free of the past faster by getting ahead of that schedule.

Retirement saving = looking to the future

With so many people struggling to overcome their past debts, it should be no surprise that they’ve neglected saving for retirement. This is going to lead to a less comfortable old age than baby boomers had imagined.

The younger you are, the more power you have to avoid this trap. Once you get your debts under control, you can turn your attention to the future by doing the following:

1. Start early. You’ve probably seen several demonstrations of the power of compounding, which magnifies the results of saving over longer periods of time. The other powerful thing about starting to save early in your career is that it becomes habit forming.
2. Push the envelope. Strive to max out your tax-deferred savings, such as 401k and IRA contributions. Then, start building up some after-tax savings as a supplement.
3. Plan to adjust. Anything that looks as far ahead as a retirement plan is going to need periodic adjustments so you can stay on track. Returns, expenses, and income all change, and your plan needs to continually incorporate this new information.

Meeting your goals = living in the present

The more you have your debt under control and your retirement provided for, the more you can stop worrying about the past and the future, and start enjoying the present. Once you reach that point, you should do the following:

1. Count your blessings. As much as you’ve earned your success, never get complacent, and never look down on people who don’t have what you do.
2. Monitor conditions. Even savings account rates are highly unpredictable, let alone stock market returns. Keep your eyes open for changes that will affect your budget.
3. Never stop adjusting. As changes come, the sooner you can adapt your budget or your savings to them, the more you can smooth out their impact.

In many ways, the past, present and future are all connected. The quicker we can pay off debt and meet our financial goals, the quicker we can take care of the past and the future and start living squarely in the present.