Being a slave to the future

Being a slave to the future

An inquiry into the logic of working in the present in order to save for future gain

What prompted this discourse was as follows: I was offered some employment during the Christmas holidays; yet my finances are healthy enough that I do not actually need the money currently and so it has no bearing on my current utility. In fact, by taking up the work, I am reducing my current utility by sacrificing my time in order to gain at some arbitrary point in the future. In this essay we shall assume that leisure time is favourable to work, and that work confers no other benefits such as increasing experience/gaining skills. Is it logical to reduce current happiness in order to make for an easier or better future? How does this apply to work and saving?

Life is (in most cases) a long-term game. The way to have the best life is to maximise total utility, rather than utility in a specific time period. Sometimes, to maximise total utility, it is necessary to sacrifice current utility. For example, studying for A Levels is not the most exciting thing I could have done with my time, however, my total utility will be higher in the future as a result than if I were to have played video games or have watched YouTube videos instead. But this should not be confused with simply swapping utility, which is a pointless exercise. That is, holding off beneficial/pleasurable consumption today so that one can consume tomorrow.  

Beyond the reason of sustaining themselves in the present, people work (for one) to derive some future benefit, for example, going abroad on holiday. Now this is logical if the utility from the holiday to be gained is greater than the utility which would have been gained from not working and if they could not have earned the required sum in the meantime anyway.

What about if there is no concrete savings goal, such as ‘saving for a rainy day’? This is now a question of probability, which further complicates the decision process. A saver sacrifices current utility in order to prevent/minimise negative utility from possible events in the future. For example, a car unexpectedly breaks down. The saver does not know for sure that his car will break down. His decision bets on the possibility that it does. If he had not saved and his car had broken down, then he would have suffered from having no functional car, or would have been forced to take out a loan to get it repaired, which owing to the interest payments, is a less favourable option than just having saved in the first place. However, if the car does not break down then the saver loses out, for they would have unnecessarily sacrificed what was their present utility. (This example can be extrapolated to life-long unexpected events.) Or maybe there is some utility to be derived from the thought that one is covered if something bad were to happen.

Chances are that at least one ‘rainy day’ type event will occur in one’s lifetime, and therefore this is a justification for saving for this. The question then is how much to save. Should one save as much as possible in order to reduce to the absolute minimum the possibility of not having enough money for when one of these inevitable misfortunes hits? Should one then become a slave to future misfortune? Of course not. The easy answer is that there is a balance to be struck. But this just means saving enough so that the average misfortune does not financially impair us; so that if our car breaks down in the future, we can still eat and pay the rent that month if it is necessary to get the car repaired. So what is the value of the average misfortune? This average will vary for specific people: those with unhealthier/riskier lifestyles will have (self-evidently) a higher average.

Money.co.uk recommends saving a minimum of three months’ worth of wages. If we take UK GDP per capita as £32,000, dividing this by 12 gives £2700 (2 s.f.)  as the average monthly wage. Multiplying this by 3 means that £8000 should be saved as emergency money, in their view. However, this figure is more relevant to middle-aged adults, who have more financial obligations, such as mortgage repayments, than a student. A calculation different to this income-based one may actually be more appropriate, such as one which looks at essential expenditure. The emergency fund savings could then be an amount which covers the cost of three months’ rent and food.

 

The rate at which money should be saved when one has a savings goal in mind depends on how prepared the person is to wait for the end goal. One sensible savings goal for young people is to have enough money for a house deposit. If I want to begin to own my own house as soon as I have settled down in a town for my job after graduation then I will need to save at a faster rate (id est by saving a greater proportion of my current income or by increasing income) than someone who is prepared to rent a house for a few years as they build up their savings. As mentioned, there is a trade-off between saving and current utility (provided additional employment must be undertaken, which is less favourable to not working). What is being weighed up here is the utility gained from achieving the savings goal earlier, against the cost of saving now.

 

Saving to increase future choice is another reason why people sacrifice current utility; for having more money to one’s disposal opens up more options to the consumer. But choice can be infinitely increased, so where does the line lie? At what point does one stop working for the purpose of increasing future choice? It is generally considered that greater choice is preferable. However, this is only true up to a certain point; beyond which, choosing from a wide selection becomes stressful for a consumer. This follows the law of diminishing marginal utility, which states that as we have more of something, the benefit we derive from it decreases for each marginal unit. The rationale in this savings justification is that the utility gained from having the choice (both from the knowledge of having choice and the probable end result – higher quality products and services) is greater than the utility lost in giving up our leisure time (the opportunity cost). However, there comes a point when the marginal benefit of increasing choice drops below the opportunity cost. It is at this point (where cost exceeds benefit) that one would stop taking up employment for this savings purpose.  

That covers the area of why people save by reducing their current happiness: to increase their rate of saving either for a specific, desired product/service, or for the two non-specific-purchase reasons — having an emergency fund and opening up choice. The question of how much should be saved depends entirely on the individual and how much he values the future benefits, as well as the opportunity cost of saving.  

I will now analyse these motives on a personal basis. The case of building up a contingency fund is probably the least important reason for me. This is because the chance of an unfortunate event which would set me back financially happening to me in the foreseeable future are very slim. I have no job to lose, no car which could break down, my main income source (student finance loan) is secure and I would benefit from free NHS treatment if I were to need it. My computer or phone could malfunction however (low possibility), both of which I am reliant upon, but I already have enough money to cover these eventualities. I do not consider it important to save for a contingency fund for beyond university, because it then becomes inaccurate to predicate one’s future income, expenditure and liabilities.

As for increasing choice, this is a more valid justification for me. My current savings are already at a level which offers me a good degree of choice, for example, I could choose to buy a second-hand car and insure it for a year, buy a laptop, or take a holiday.  This choice ends for if I want to buy a newer or better car, or if I want to enter into a mortgage. However, both of these purchases are currently not required and will not be required for several years, by which time my savings will have grown anyway. There is also less pleasure to be derived in the present from the prospect of future benefit the further into the future the gain to be had is. Therefore, I value this savings approach only a little.

Perhaps the most relevant savings approach for me is to save for a specific purchase, that being the mortgage deposit for a house. According to an article by The Independent, an average deposit for first-time buyers is £33,000 (2 s.f.) — 16% of the purchase price.  As I am hoping to get a prestigious job in finance, this may require me being based in London. In which case, the required deposit increases to £107,000 (3 s.f.) — 26% of an average property value.  If I were to work with startups in Berlin then I would require a property there. Similarly, I could find work in Frankfurt am Main, working in finance. The cost of living is lower in Berlin than in Frankfurt, which is significantly lower than in London. One bedroom apartments can be found in Berlin for under €100,000, but these seem more sparse in Frankfurt and less pleasant than those in Berlin. While an average fixed mortgage repayment rate seems to be lower in Germany compared to the UK, a larger deposit of up to 40% for expatriates could be required. I am, of course, far from having such a large amount of money at my disposal. However, I have four years before I could need this money. But this still equates to me saving in excess of £8000 per year, which is only achievable for the year in which I have my year abroad (if I find an internship). Therefore, it will most probably require me to work for at least a year (or three for a London property) in order to amass a deposit, regardless of whatever employment I take up in the short-term. Also, the total value of undertaking short-term employment (whether seasonal or occasional) would probably only result in me being able to afford a deposit just a couple of months earlier. Consequently, saving for this reason is also of little importance to me.

To conclude, I do not need to save anymore for an emergency fund; I value increasing my choice any further little, and accomplishing my savings goal marginally earlier is of no big consequence. This draws the result that I do not need to undertake employment, or restrict current consumption for the purpose of saving. However, I will still allow my savings to grow through what is not spent on consumption and through what I receive as gifts. I may still undertake employment if it is pleasurable, if it confers some non-monetary benefit, or if there is a very low opportunity cost (i.e if I have nothing else to do on that day).

BY: Jonathan Dunn

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