Wiki defines the term ‘delayed gratification’ as “Delayed gratification, or deferred gratification is the ability to resist the temptation for an immediate reward and wait for a later reward. Generally, delayed gratification is associated with resisting a smaller but more immediate reward in order to receive a larger or more enduring reward later.” In terms of your personal finance that would mean, the money you earn instead of spending for some of your immediate pleasure today, leaving nothing for tomorrow and invest for more in the meantime. Delayed gratification would be to stop the spend today -> invest -> reinvest -> earn a lot more: that way you would have the ability to spend even more in future. In this article, we will look into the delayed gratification in light of ‘Personal Finance’.
Some theory behind Delayed Gratification
This whole concept of ‘delayed gratification’ started back in 1960’s by a Stanford professor named Walter Mischel, when he started studying some of the important psychological human behavior. Consecutively in 1972, the famous ‘Marshmallow Experiment’ got published and this study becomes very popular. In simplistic term, scientist offered a very simple deal to a group of 4-5-year-old children: “you can have one marshmallow now, or if they wait will get two.” Most of the children were just happy with one as soon as the researcher left the room and only a few able to resists for two. That wasn’t the interesting part of the study, the interesting part was what came out after few more years. Scientist continues to follow up on those child’s and found out that children’s who waited have better SAT score, better health, happier, better social skills i.e. generally better score in most of the life measures.
How does it impact to our financial health
If we do some very simple mathematics we will see the same notion of ‘delayed gratification’ have a profound impact on our financial well-being. In the following table, I did some calculation on what is the money worth today will be worth in 5 years – 10 years – 15 years – 20 years time if you waited & invested the money instead of spending it today.
This is what happens to your money if you choose to invest and get like 10% compounded profit on the investment instead of spending:
Now let’s look at that not in terms of money/dollar but some goods and consumable items:
When I calculated I looked at the average price of the items and 10% compounded profit on investment to find out the future equivalent product. Some might argue that the price of the items also go up, but do they really? With the new technology etc. price of things doesn’t actually go up that significantly. Think about the price of a car, some luxury items, laptop, flight price etc. 10 years back vs now. You will find in a lot of the cases it has actually gone backward. Some cases like house and gold they go up but they deemed more like an asset rather than intangible products.
Eight simple way to resist your temptation today
All that is good, but the most important question is ‘How do I do this’, for most people whenever we see an opportunity we think “life is too short let’s enjoy it today”. Furthermore, like what we noticed in the marshmallow experience: the ability to delayed gratification is a behavioral trait of most people and only a few have this naturally. May be that’s why there are only a few billionaires in the world and not everyone is rich enough to do whatever they want. Regardless here are some tips and tricks that you can help you:
Block your money: it’s not only you – most of the people would do the same when there is available cash in the bank people spend on the desired items. So the simplest solution to that problem is “do not have any extra cash available” block all your cash. Invest in things from where it is a bit hard to pull out the cash like a business, property, equity, investment accounts etc. and have those as pre-commitment so even before the cash from your salary hit the account it has gone for a good cause.
Invest in long terms: Short terms investment always riskier and neither is as balanced. There would be more uneven up-down and your emotions will go through the roof and you will make the wrong decision in the short term investment game. Think about a ‘day trader’ or ‘investment bankers’, good return but realistically that is a hard job and only few can handle it. Another issue with the short-term investments is you gain the profit back too soon and you go on spending spare. So always focus on long term, I mean 5-1-15 years long term.
Do not upgrade your life style too quickly: When you get a pay-rise, and new contract, a new business income stream – do not go and adjust your lifestyle too soon as you get it. Procrastinate for some time and even when you do increase your lifestyle do not use the full income but only use a portion of it and other portions keep investing.
Do not spend on behalf of future you: For example, you are buying a car – best is if you buy it with the cash available to you and not even get into any bad debt cycle. In-case you have to and get a loan, then do not assume three-month time you are to get a pay rise and you will earn $500 extra per month so put that $500 extra on your repayment as well. In those scenarios, wait for that extra income to flow in and do not use even the whole of the pay rise, remember on the point 3 above? When you upgrading your life-style only do it with the portion of it.
Be bold – ignore peer pressure: 80% of the intangible spend we do – my take on it is, its peer pressure. Unless you drive a nice car your friends think you are not doing well in the job. If you don’t give a 2ct diamond ring your girlfriend would not marry you or what would in-laws think. In reality is, no one knows what is your total asset and how much asset worth or to the point how much is your debts – so does it really matter what they think? End of the day you are the getting the financial freedom or getting stuck in the never ending pay-check-pay check cycle. Warren buffet still drives a 2014 Cadillac XTS, Mark Zuckerberg still come to work on VW Golf, and Steve Jobs used to always wear the same cloth – and what difference does it make to their life, job, finance? The whole world still knows who they are and they are happy at what they do.
Know your future worth and visualize it: have some mechanism to visualize where your wealth is going and how they are creating more money for future you. I have a separate article on this where I showed some net-worth visualization tool. This will help you to keep your apparition alive.
Have a goal in mind: Have a goal in mind where you want to be in 5 years, 10 years & 20 years’ time. You cannot run on a path for long if there is no destination assigned – you would be bored to death and stop.
Most importantly reward yourself: Do not be too harsh on yourself, once you achieve some milestone have a bit of break and have a bit of fun. Spend some money on the things you like, share some of it with someone you love. That way you will stick to your goal for longer. I have a separate article that talks about budgeting and how to stick to the budgets.
About the author: My name is Shahnewaz Khan (tamal_khan at hotmail.com) I am a Management consultant at my day-job & have done a fair bit study from post-grad Business school. I find there are a lot of principles from my day jobs & the things I learned at B-School can be applied to our daily life. In my blog, I write about those insights. Please subscribe if you like for regular updates.