The Ability To Resist Temptation Is Useful For Attaining Financial Independence
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
A form of self-gratification worth highlighting is delayed gratification, or otherwise the ability to restrain oneself from immediate indulgence in exchange for a later reward. Delayed gratification also happens to be a highly useful skill 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 Tale of "The Kids" vs. "The Marshmallows"
In 1972, a study was published from a group of researchers out of Stanford. In this aforementioned study, children were given the choice of having one marshmallow immediately, or avoiding eating the first marshmallow until the researcher returned to the room in exchange for receiving two marshmallows.
This is the ultimate choice.
One now vs. Two later.
Instant Gratification vs. Delayed Gratification.
Keep in mind, these children were preschoolers, the most likely crowd to give in to the temptations of instant reward and gratification. But some didn't. Now that's what I call restraint! Leaving a child alone with a marshmallow and giving them a simple rule, "don't eat it and I'll give you another when I return", and some chose the high-road.
So what did this study reveal? A LOT!
As an extension of the original pioneering experiment, the researchers actually followed up years later with the original preschoolers. You can see the studies for yourself here, here, and here. 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!
Remember however, this just demonstrates a correlation and correlation does not equal causation. Regardless, this pretty damn compelling data.
Perhaps the traits the preschool children showed early in life can help inform us of how delayed vs. instant gratification can effect our finances.
Consider that if you value delayed gratification, perhaps you might track your net worth and budget better than someone who prefers the instant rewards of a "purchase".
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.
These are just a few examples of how the inclination to delay rewards and resist sudden impulses can make a significant impact on your finances over time. Before we close on today's lesson, perhaps we should clarify exactly the point of this post: life is often better in the long-run when we delay gratification.
Let's take this a step further however. I consider delayed gratification to be the equivalent of saving AND investing. Not only saving. Not borrowing and investing. SAVING AND INVESTING.
Saving and investing allows you to take advantage of the ultimate form of delayed gratification... compound interest!
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. I hope by now you get the point. Save and Invest.
Until next time.
I started this blog because friends and family often asked me similar questions regarding personal finance. I was surprised just how much people were interested in improving their financial situation, yet had no idea where to start. It made perfect sense to start a blog and share all the information that I have learned along the way with others. You will find many resources and links referred throughout the blog. I have found all of this information useful and continue to grow my knowledge and understanding in the personal finance space. Admittedly, even I struggled heavily in the beginning with understanding how to improve my financial situation. The power of reading and note taking got me where I am today and will continue to provide a return on investment for years to come. I look forward to sharing with you along the way.