CFI Blog

Save for Now or Save for Later? Where’s the Balance?

I’m fairly actively involved in a website called Brightscope, where, among other things, you can find out information about your 401k provider and ask questions of financial advisors. A recent question sparked a lot of discussion and some controversy. The question was whether or not you should save for now or save for later. The person wanted to know how to balance long-term goals like retirement, which she had handled through investing in her 401k, with shorter-term goals, like buying a house.

This is a tricky question to answer because it really belies the battle that we have between our thinking selves and Monkey Brain. For those of you who are new readers, Monkey Brain is what I call the limbic system in our brains. It’s the one which evolved from way back when, in the times when we were concerned about survival on a minute-to-minute basis. Since back in the good old days, we weren’t expected to last very long, we sought immediate gratification. No point in squirreling away the kill for later if we weren’t going to be around to eat it.

Monkey Brain is still very prevalent in our lives. He’s the one who tells you that calories you eat on vacation don’t count and that you can start going to the gym tomorrow. He wants gratification right now. Can’t afford to pay cash for the 183” flat screen TV going into the man cave? No problem. Charge it on the credit card and you can deal with it in the future.

On the other hand, we have the thinking self, which is the cerebral cortex. It’s the part of your brain which is responsible for making “adult” decisions, like deferring gratification and sacrificing a little so that you’re not consigned to eating cat food and being a bag lady in the future. Naturally, since your thinking self is inclined to include future versions of you into consideration, there’s quite the tension between Monkey Brain and your thinking self.

The question of how to handle the balance also depends on where you are in the continuum of life. The younger you are, the more of a future you have in front of you; whereas, as you get older, you start to contemplate spending money on things to have and do now while you can still enjoy them. It’s the paradox of balancing a safety net with wanderlust, since you want to travel while you’re young, but probably can’t afford to travel much, while, when you’re older, you may not physically be able to travel as much as you want.

Financial planning textbooks have a stock answer for this question: the accumulation phase and the decumulation phase. In the accumulation phase, you’re investing and saving and planning for your future when you no longer have an active income. In the decumulation phase, you’re living off of your stockpiled assets and the dividends, capital gains, interest, and in some cases, income that they throw off.

Easy enough, right?

But how do you know when to flip the switch, and where’s the balance now between the present and the future?

When I was younger, my mother cautioned me not to scrimp so much that I didn’t enjoy my life now. Of course, I may have taken her a little too literally at times and dug myself into a hole! However, in her advice was, I think, the seeds of where you can find the answer to where to find the balance.

As I mentioned previously, the brain engages in a battle between wanting something now, which is determined by Monkey Brain, and wanting to save some for later, which is determined by your thinking self. Dr. Samuel McClure of Princeton and others demonstrated how the brain reacts when presented with rewards now compared to rewards later. The more immediate the rewards are, the more Monkey Brain is going to light up and want to get the reward. However, if the reward is delayed and there is no immediate alternative, then the prefrontal cortex will be the primary decision-maker inside your head.

This distinction is illustrated in the following example.

If you’re offered $10 now or $11 a year from now, then, even though $11 is worth more, you’re more likely to choose $10 right now. Monkey Brain engages in an act called hyperbolic discounting and concludes that the value of $10 now is way more than $11 a year down the road.

However, if you’re offered $10 in a year and $11 in a year and a day, you’ll choose the $11. The extra time that you have to wait to get the extra dollar pales in comparison to the extra dollar that you receive, and the time that you have to wait is long enough that Monkey Brain isn’t concerned about the outcome either way.

The first time you have to say no to Monkey Brain, it’s relatively easy to do so. However, like the child who asks for candy every 30 seconds during the entire trip to the grocery store, eventually, you get sick of hearing him ask, and you give in. The wearing down of your reserves and ability to say no to Monkey Brain is called ego depletion, and unless you combat it, you’ll wind up giving in at an inopportune time.

That’s when the balance will become imbalanced.


YOU: “But we need to save for retirement!”


YOU: “OK. You win!”

If you only save for the future and never give yourself any reward, you’re going to become tired of living a sere lifestyle. You’ll feel like the someday that you’re saving for will never come and you will give up and stop saving altogether. It’s the same reason that someone who needs to lose 100 pounds has a much lower likelihood of succeeding if that person sets the goal as dropping 100 pounds and has nothing in between. Even after losing 10 pounds, the remaining 90 will seem a long way away and not even worth trying for.

Therefore, in order to get the balance right, you do need to reward yourself some now.

The key is to find rewards which are both very meaningful to you and don’t cost that much.

One great example is posited by frequent commenter and friend Nords (who, despite being a Naval Academy grad, is a great fellow) where he discussed how his family thought about the frugality tipping point. It was important to his family to be able to give to charity. This would be a great example of saving for something now while encouraging yourself to save more for later. You can give a little bit to charity and you feel good. Research from Harvard’s Lalin Anik and others shows that the more you give, the happier you become, as the vental striatum is stimulated – the same area that gets stimulated when you use cocaine! Therefore, because the more you give, the better you feel, you’re encouraged to give more. You’ll want to invest more so that you can earn more so that you can give more. Virtuous cycles that even Monkey Brain likes!

When you’re aligning your activities with your priorities in life, then you get that same type of virtuous circle started, and you are encouraged to undertake activities which enable you to get more of the same rewards in the future. Even Monkey Brain recognizes that you can’t, for example, give away all of your money right now, as you’d be broke, and, then, no bananas. Sad trombone. So, he’ll get engaged to do things which encourage more giving.

Thus, once you’ve satisfied Monkey Brain and given him a banana to play with, your thinking self can focus on longer-term goals, saving, investing, retirement, and the things you want to do when your working days are over. Satiated, Monkey Brain won’t interfere with those plans, particularly if he knows that another reward is just around the corner.

How do you create that balance? Are there times when you give in? Tell us what you think in the comments below!

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John Davis
John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.

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