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The ability to resist temptation is the key to financial strength
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.
self-gratification - the act of pleasing or satisfying oneself, especially the gratifying of one's own impulses, needs, or desires. Source
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.
The story of the kids and the marshmallows
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):
Not bad for the pain of waiting a few extra minutes for two marshmallows. So what does this have to do with finances?
How delayed gratification affects 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.
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