Why Getting Out of Debt Is All About Timing

Time is money. Everybody knows that. But everybody forgets it. A nice pair of shoes today could be worth a worth month-long Caribbean cruise in 20 years; buying a big house today might mean putting off retirement another five years. But we rarely think in these terms, because it’s really hard.

We trade money for time all the time. Go to a plant nursery, and you can buy a mature rhododendron plant for $40, or a starter for $10. Heck, you buy seeds for a few pennies, or a mature tree for hundreds of dollars. The difference? Time. If you had all the time in the world, and not a lot of money, you’d always buy seeds. If you had all the money in the world, you’d pay someone to fill your yard with blooming flowers every day. That’s not the way most of us live. We weigh time and money and balance the two, though we rarely think of it that way.

If you’ve ever seen a comedian flub a joke, the awkwardness tells you how critical it is to have a good sense of timing. But have you ever heard of a course in high school called “Good timing?” No, because timing is very tricky. It’s essential if you plan to make the most of your money. In fact, it might be the most essential financial skill of all.

Making things tougher: Time is abstract. Money is tangible (or at least we believe it is, and that’s good enough.) Money today is temptation and impulse (spend me!). Money tomorrow isn’t money anymore. It’s savings, and savings requires self-discipline and planning. Today vs. tomorrow is an internal struggle that has existed since the dawn of humanity. Money is just our modern way of working it out.

What to Do … & When to Do It

Saving is not always superior to spending. The space that lies in between those things is investing — spending money today hoping that it leads to more tomorrow. Investing in a business or a stock is an obvious form of trading today for a hopeful tomorrow, but so are things like going to school, or even buying a professional wardrobe. It’s perfectly OK (and almost unavoidable) to run up a small credit card debt during a big professional move in your 20s, for example. Pay it off with that spiffy new salary in less than six months and you are none the worse for wear. But if that new salary never arrives, and that debt spirals into a never-ending cycle of revolving credit card interest, you’ll be well on the way to financial ruin.

How do you know when to pick today, and when to pick tomorrow? It’s almost always a question of timing. Bad timing is one of the key reasons people get stuck in life, and find themselves deep in debt. Meanwhile, talk to any rich inventor (Bill Gates? Henry Ford? Howard Schultz) and you will hear them talk about the importance of good timing, which is often even more important than the thing invented.

There’s a ton of luck involved in timing. Just ask the fellow who wrote the book “Dow 36,000” that was published just a few months before the 9-11 attacks. Or ask anyone who just bought a house and then was hit by a surprise job loss.

Timing is a central element to so many critical life decisions, yet it’s something we rarely discuss out in the open:

When to go back to school and earn an advanced degree
When to start a family
When to buy vs. rent
When to retire
When to invest aggressively vs conservatively
When to quit your job and start a small business

The real answer to all these questions lies in the future. We can’t actually predict the future, yet, so some amount of guesswork is still involved in all these tricky decisions. However, we can imagine the future, and that just might be the key to having good timing.

Good News for the Dreamers

Joe Kable of the University of Pennsylvania is a neuroeconomist — he studies the intersection of money and our brains — and he has found a fascinating connection between people who have vivid imaginations, and folks who are good with money and time decisions. Folks who are good at imagining how great that new car will smell someday are much better at saving for that new car. Folks who have already picked the paint colors for their some-day-soon kitchen walls are better at saving up for a down payment.

It might sound crazy, but it seems true: For once, dreamers are the more pragmatic folks.

Hal Hershfield, an economics professor at NYU, conducts similar research. He spends his time trying to convince folks that they’d make better financial decisions if they talked to themselves a little more. Not like a crazy person after a frustrating phone call with a financial advisor, but if they talk to their future selves. Folks who imagine a conversation with an older version of themselves often make much better money decisions, like this: So, 30-year-old me — 60-year-old me here knows that $1,000 handbag would impress your friends, but that would have been worth about $40,000 to me, or more to the point, that’s another six months I have to work before retiring. Plus, I promise you’ll only use that twice and then it’ll gather dust in the closet. So don’t buy it!

Some researchers find they can trick consumers into better savings habits simply by showing them computer-simulated older versions of themselves.

So while we can’t really predict the future, imagining it can be the next best thing. Imagining all the possibilities also helps you make more realistic predictions about the downsides of investments or spending habits — in other words, it can give you a better sense of timing. (Credit.com has a good free tool along these lines which shows you how changing your behavior relating to your debt will impact your credit score over a six month period.)

Time is money, but money is just a method for getting the things you want out of life. We should think the same way about time.