Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you.
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Today, we outline a common theme in the financial independence community, delayed gratification. In financial terms, saving and investing is the equivalent of delayed gratification.

The ability to save is heavily dependent on spending behavior. But why do we spend so much as a society? What is it about spending that taps into our internal reward system? Enter the concept of self-gratification.

Delayed gratification is actually a form of self-gratification. It is the ability to restrain oneself from immediate indulgence in exchange for a later reward. Delayed gratification also happens to be a highly useful tool for increasing your net worth.

The concept of delayed gratification is simple: instead of immediately indulging yourself for a reward (instant gratification), the temptation is resisted in an effort to attain a future reward. 

​The negative connotations around immediate reward is ever-present in contemporary society. Instant gratification is centered around consumerism and reward-seeking behavior which happens to be the crux of modern day America. Financially speaking, instant gratification is also known as keeping up with the Joneses.

We are driven by a culture of consumerism and spending in the United States. Some estimates indicate that we see up to 10,000 ads per day, and that is only from digital sources. That number doesn't even include how many billboards, newspaper ads, magazine ads, and physical advertisements we are exposed to on a daily basis. Being driven by consumerism is not friendly when it comes to personal finances. Instant gratification- keeping up with the Joneses- is inherently self-defeating when it comes to finances. The downward spiral begins when you realize that the first purchase often does not lead to the amount of reward that you originally anticipated. This can often lead to more purchases on the tail-end of a recent purchase, also known as the Diderot effect.

The Diderot effect is named after French philosopher Denis Diderot who sudden came into money after the sale of his library. What he did with his windfall was purchase a beautiful red dressing gown, which is exactly where his troubles began. Suddenly, this red gown was the nicest thing Diderot owned and it made all of his other possessions look lousy. He realized there was only one way to fix this- purchasing new items to "live up" to the beautiful red gown. He began replacing straw chairs and old tables until all of his possessions were suddenly beautiful, all at a great expense to Diderot.

We have this happen all the time as well. Buying a new phone comes with purchase of a new case, a protection and insurance plan, premium app purchases, and a higher monthly bill to boot. Redoing your deck leads to new furniture, a brand new gas grill, plants, and the trending decorative lighting. This is the Diderot effect in full force. Your goal is to interject before the spiral of consumption begins.  

In 1972, a study was published from a group of researchers out of Stanford. The design of the study involved giving children the choice of immediate gratification or delayed gratification. The children were placed in a room with an investigator and given a marshmallow. They were told that if they waited and did not eat the first marshmallow, they would be given a second marshmallow. Then the investigators left the room for a short period to let the children decide for themselves- eat the first marshmallow immediately or wait and have two to eat in the future. In other words, instant gratification versus delayed gratification.

Now understand that these children were preschoolers, the most likely crowd to give in to the temptations of instant reward and gratification. The remarkable fact is, some didn't give in. Some waited. So what happened to the children who were able to wait? They followed up years later with the original cohort of preschoolers and cross-referenced the data of those who waited versus those who didn't. You can see the studies for yourself here, here, and here. So what did they find when they followed up with the original students?

On average, the students who avoided eating the first marshmallow in exchange for two marshmallows later (i.e. those that demonstrated delayed gratification):

• More academically and socially competent, verbally fluent, rational, attentive, planful, and able to deal well with frustration and stress. Source
• Higher SAT scores. Source
• Lower rates of Obesity 30 years later! Source

Not bad for the pain of waiting a few extra minutes for two marshmallows. ​So what does this have to do with finances?

The children who chose delayed gratification in the Stanford research experiment overall scored better in nearly every objective measure when assessed years later than the children who chose instant gratification. With better ratings of academic competence, social competence, rationality, attentiveness, planfulness, and improved ability to cope with stress, who better suited to resist keeping up with the Joneses than those who displayed delayed gratification!

Perhaps the traits the preschool children showed early in life can help inform us of how delayed vs. instant gratification can effect our finances.

For example- someone who is more inclined to value delayed gratification might avoid the temptations of a quick purchase in exchange for long-term growth of your net worth. If you can resist temptation to purchase new things and you value savings, you are likely in a better situation to invest. By investing over a long period, you are likely to participate in the profound powers of compound interest. All of this begins with the simple ability to resist instant gratification in exchange for the future rewards of compounded growth. A better life is often the fruits of displaying delayed gratification. Working out once is not going to give you the body of your dreams. Skipping a small purchase at a gas station is not instantly going to make you wealthy. Eating one salad will not ameliorate the risks of eating poorly at every other meal. Rather, it is the cumulative effect of these choices to delay your gratification and reward system in exchange for a better future self.

Make the difficult sacrifices now to provide better financial means in the future. Purchasing everything now, in the moment, destroys your ability to participate in one of the greatest mathematical phenomena known to man- compound interest.

• What It Means To Be Frugal
• How To Save and Invest In Low-Cost Index Funds
• Investing | The Basics
• The Power of Compound Interest

We are living out the cautionary tale urging us to live below our means. Consider that some estimate that we make roughly 35,000 decisions per day. A survey conducted by Dan Goldstein and Principal Financial Group indicated that although we make thousands of daily decisions those who lack financial confidence are 64% more likely to postpone major financial decisions- such as managing investment or retirement accounts. 

We live in a consumerist society filled with things we likely do not need to impress people we probably have no business trying to impress. Consider what might happen if you spend a weekend with friends who own a large home and two new cars. Or maybe a long weekend with parents or relatives who own a beach house with a inground swimming pool. How might you feel coming out of that experience? I assure you that this recent experience will have you more likely to spend.

For most, success and failure seems to be judged by material possessions, especially in comparison to others. Worse yet, time spent with friends or family who are spenders subjects us to a psychological theory known as recency bias. This type of bias is an error where we place greater importance on events that occurred more recently compared to events occurring further back in time. That explains why you suddenly want a new car or to upgrade your kitchen after you spent time with anyone who is a big spender concerned with the display of high social status.

Taking a moment to stop and assess whether your financial decisions are related to competing with others versus your long-term goals is an enormous step worth taking. Taking that step is more difficult than you might initially think. Remember that we make 35,000 decisions per day, many of which I bet are around finances, or making the decision to further procrastinate finances. Amidst all those decisions, you need to discover a way to consciously address those related to financial decision making.
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This process of becoming aware of your financial situation will bring about many challenges. Admittedly, I have often experienced the strong urges to display my financial status to others by competing with their purchases. Yet I resist because it is in the best interest of my future self to do so.

• To give context, presently I live in the low-income part of town above an old automotive shop and drive a car with over 200,000 miles. I purchase everything I can at discounted rates and have not seen a new pair of shoes in over 8 years. Despite the appearance of struggling financially, my wife and I are rapidly approaching a net worth of half a million dollars- which we aim to attain by early next year.

Given the context above, imagine the frustration of sitting with friends and family who readily assume that we are not "doing well". Imagine the outrage I might have of knowing what real financial strength means, and listening to a dozen people sit around talking about who "has money" and who doesn't. This is a fruitless conversation often coming from those who have no real financial values of their own.

Displaying financial prowess with the purchase of material possessions should not be top priority along your path to financial independence. Very few people around us actually have any idea how much wealth we are actually accumulating. Why? Because we don't buy things that display how much money we have. The reality of the situation is you have to become alright with nobody knowing how much you are worth. You have to realize the only person who needs to know your financial worth is you and a significant other, provided you have one. Living a life of frugality and wealth accumulation is often not very attractive early on in the process. Unless you want to walk around and show people your account balances (I do not recommend this), the only person who really needs to knows how "well" you are doing financially will be you.

I suggest regularly, perhaps even daily, going through the following reflective steps to incrementally build awareness:

​1. What are you thinking about, or regularly, purchasing? 
Like it or not, purchasing decisions are always near the forefront of our minds. Whenever you see something you like, you immediately picture yourself possessing it, wearing it, driving it. This is just basic human nature and the sooner you realize you are drawn to acquiring more things, the sooner you can begin to break the habit of purchasing needlessly. This is the foundation for developing awareness. You are thinking about either consciously or subconsciously, it's just the nature of our being. 


2. Why are you thinking about, or regularly, purchasing?

• What spurred the decision to purchase this item? Was it out of need/necessity or because I just saw somebody else with one and I have FOMO (fear of missing out for the older folks)?
• Is this purchase something that I need to fulfill my daily duties?
• Will I attain lasting satisfaction from this purchase or will it be likely be fleeting and otherwise not contribute to a lasting memory or experience?
• Do I really need to "treat" myself right now or am I getting a little soft and looking for a pat on the back? If your looking for a "feel good" consider exercise, meditation, aromatherapy, music, or just petting the damn dog instead of attempting to buy your way to happiness. 

3. How much are you currently saving and investing? 

• Figure out exactly how much, each paycheck, you are saving down to the very last dollar.
• What account is it going into?
• What is your present net worth?
• Is your net worth as high as it should be?

4. Why are you saving and investing?

• Why is it important to me to have a high net worth?
• Would I like the option to quit my job at any time if I want?
• What does financial independence provide me that "purchases" cannot?
• What does my ideal day/life look like and am I getting closer to it financially? Some individuals will have lower annual costs than others when it comes to an ideal day/life.

Contemplate these four questions everyday and you will be amazed at how quickly you start to build financial prowess and control over your finances. As the old saying goes "you don't know what you don't know". Walking around on autopilot only knowing how much you have in a checking account to make a small purchasing decision is not the path to financial independence and strength. Take control of your financial future and break the habit of letting finances hide themselves inside of the 35,000 decisions you make everyday.

• How to Calculate Your Net Worth
• Is Your Net Worth As High As It Should Be?
• How to Increase Your Net Worth: 3 Simple Steps
• Money Management Series: 3 Parts

The definition of the word ​invest is:

Further, an investment ​is:

The purpose of investing is to make an initial purchase of something (the outlay) in hopes of income our profit in the future. The income or profit is typically assessed as a return on investment (ROI) and could come in the following forms:

• Dividends - such as owning a stock that pays monthly or quarterly dividends to you for owning that stock
• Interest Payments - payments you receive at a fixed rate typically agreed upon when you initially open the account or lend the money
  • Bonds, Money Market Accounts, Bank Accounts, CD's (technically a dividend but taxed like ordinary income)
• Capital Gains - the profit generated from the sale of a property/investment - dictionary.com

There are actually many ways you can begin investing but perhaps the simplest and most common way is investing in the stock market, online. 

Whether you choose to begin with automated savings to a retirement plan with your employer, or elect to manually make deposits into your savings and investing account, you first need to identify if you will "do it yourself" or utilize a professional money manager. Doing it yourself can save a significant amount of money over time, but if you are not willing to learn and study about investing and finances, consider hiring a professional. 

Here are some types of accounts where you can invest in the stock market:

• Employer retirement plans (401(k), 403(b), etc.)
  • Contact your HR department at work and ask about what forms/information needed to set up this account
  • *NOTE: If your company offers a matching contribution, I strongly advise you contribute whatever amount gives you the maximum matching contribution, otherwise you are leaving "free money" on the table from your employer. I would ask my employer "How do I get the maximum matching contribution from our company?".
• Roth or Traditional IRA's
  • Just call or visit Fidelity or Vanguard's website (you can pick whatever company you want) and follow the steps for setting up an IRA and link your bank account. It really is that simple.
• Taxable Brokerage accounts - Again, you may choose whatever company you want.

With all of the accounts listed above, I like to purchase low cost index funds in either a Roth IRA or 401(k)/403(b) plan due to the tax advantages of retirement accounts. Many in the financial independence community also utilize retirement plans to purchase low-cost index funds due to the specialized tax treatment for retirement accounts. Ultimately, the decision is yours. 

For traditional 401(k) and 403(b) and traditional IRA plans, you may be able to lower your current taxable income, but note that you will still have to pay tax later on withdrawals once you retire (based on age 59 1/2 or older for these types of accounts). This "tax break" occurs by notifying the IRS that you set money aside to these tax-advantaged accounts, thereby lowering the amount the IRS can tax you on. With traditional accounts, there is also required minimum distributions (RMD's) starting at age 70 meaning you have to take out at least some money, even if you do not wan to. Keep in mind that their are income limits for these tax breaks so if you are a high earner, find out what income level phases you out of these tax advantages. 

For Roth 401(k)/403(b) plans and Roth IRA's, you get to withdrawal the money in retirement tax-free (typically starting at age 59 1/2). The downside is no "tax break" now like the traditional accounts offer outlined above. 

Be advised that there are limits to the amount of annual contributions you can make to these types of accounts. Visit IRS.gov for present year contribution limits for all types of accounts. 

By no means is this investment advice nor is it designed to be a comprehensive outline of the entire investing world. 

The most common problem remains that most people get scared off by the "complexities" of investing. In reality, as highlighted above, getting an account open to start investing is actually quite simple. After your account is open and you put in your first small sum of money, then you can consider yourself a beginner investor. Realize that over time, you will fill in the gaps in knowledge just by having an account and asking questions (and making a few mistakes along the way).


Leave a comment below on how you feel or felt about first entering the "investing world". 

Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you.
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Your net worth is an excellent indicator of how well you accumulate money over your lifetime. Certainly, net worth is inclusive of more than just cash savings, as the equation indicates above.

Consider however, net worth is really an indirect (or arguably a direct) measure of your spending behaviors. If you accumulate "things" instead of "assets" in your lifetime, you likely will likely have a very poor showing when it comes to calculating your net worth.

Purchasing depreciating assets such as cars, boats, clothes, shoes, etc. contributes to a low net worth because you are spending what should instead be saved and accumulated. 

If you were to purchase a house, or securities, or any other appreciating asset, you would otherwise expect your net worth to increase.

Here is the catch... having a big house and displaying high social status by mortgaging and borrowing can give the appearance of high net worth, but actually leaves you worth next to nothing.

My favorite simple equation for determining how much you "should" be worth is based on annual income and your age. It comes directly from the book The Millionaire Next Door by Thomas Stanley.

I really like how this equation actually provides an excellent reflection of your spending vs. accumulating behavior to date.

Essentially, if you make $600,000 a year and you are 50 years old, with a present net worth of $450,000, you are actually a fairly poor accumulator of wealth. Per Stanley's equation, you should be worth $3 million! 

Why $3 million? Using Stanley's equation, Expected Net Worth = (Age x Pre-tax Annual Household Income)/10, simply plug in the theoretical numbers listed above.

• ​Expected Net Worth = (50(age) x 600,000(pre-tax income)/10 = $3 million!

If you are making this type of income and have only managed to save a small portion of it, you live a high-consumption lifestyle.

A high-consumption lifestyle is the plague of the West in the 21st century. Displaying high social status to others instead of attaining a high net worth - which typically nobody sees - is a no contest. We tend to lead a lifestyle geared more towards impressing others as opposed to improving our own character and merit. It is truly a sad state of affairs for the average American household. Is it really any great mystery why rates of divorce, unhappiness, and depression maintain such high rates? I think not.

Let's consider a more realistic scenario with more pedestrian numbers than the ones used above. Take a household earning $70,000 combined pre-tax income presently at age 35. Cut them a break right? After all, they are only 35! They aren't doing too bad.

Not so fast...
Using these numbers we figure this 35 year old couple should already be worth $245,000

• Here is the math... Expected Net Worth = (35 x 70,000)/10 = 245,000.

Consider for a moment that most people in the United States, even one's who are much older than our example couple, barely have enough savings to cover a month's worth of expenses let alone $245,000.

There is a solution however...
Start living below your means, not above them!

Best-selling author James Clear eloquently describes how certain outcomes can be a lagging measure of your habits. Poor financial habits and high spending behavior almost always equals low net worth. Frugality, savings, and investing are typically habits that yield an eventual outcome of extraordinarily high net worth's, even with very modest incomes of $70,000 or less per household!

Stanley's equation above is certainly not a perfect example because maybe you are at the very beginning of your journey. Perhaps you just paid off a significant amount of student loan debt or paid for your own wedding. Of course this equation would not capture this event in such a unique situation. I believe that this equation would be something to turn to after you finish eliminating your debt to help keep you motivated along your path.

No matter where you are now remember, net worth is timestamped and very specific to a particular point in your life. This means that you can change it, significantly. All you need are better habits.

Not sure where to start or how to improve your habits? I suggest taking a look at Clear's book Atomic Habits. He gives great insight on why goal setting is dead and achievement is largely based on relatively mundane "habit stacking". 

Let us know in the comments below what you learned when you calculated your "expected" net worth using the above equation.

​Until next time...