One Big Obstacle Keeping You From Achieving Financial Security

 

Video Transcription:

A Stanford professor back in the 60’s took kids mainly four and five, put them in a room one at a time with one marshmallow. The instructions were: If you can go 15 minutes without eating this marshmallow you’ll get a second one at the end of the time.

What the heck does marshmallows have to do with money? Well, not a lot really but some of the lessons learned from this experiment have a lot to do with how we manage money.

There’s something called present bias. What present bias says is that we overvalue immediate rewards at the expense of long-term goals. Think instant gratification.

Lessons Learned

One lesson we can learn from this experiment is delayed gratification. When a reward stares us in the face we often give in to the temptation of instant gratification. In this experiment what do you think happened?  Yep, that’s right.  Most of the kids ate the marshmallow, they gave in to instant gratification.

Here’s what’s fascinating, in this study and in subsequent studies they found that kids who were able to delay their gratification had higher SAT scores, had lower levels obesity, scored higher in other general areas of life, and their behavior was reported better by their parents. I find this fascinating.

Delayed Gratification & Our Money

What if we as adults did a better job at delaying gratification when it comes to our money?

What if:

  • We don’t try to keep up with the Joneses.
  • We have long-term goals and we make short-term decisions in light of those long-term goals.
  • We don’t buy the more expensive car.
  • We buy a less expensive house.
  • We don’t take the most expensive vacations.

We’d be delaying gratification knowing that in the future we’ll have more success in our financial life.  Just like the kids who delayed gratification had more success in their lives.

 2 Takeaways:

  1. Since 1959 the average savings rate for US families was about 8.25% per year (St. Louis Federal Reserve Bank). People would save on average 8.25% of their income. In December of 2017, the savings rate for American households was 2.4%.  What does that tell you? What it says is that people are saving a lot less money. Now there’s a lot of factors that go into how much you’re able to save, but one of the big factors is consumerism; we spend too much. We give in to what…instant gratification.
  2. When we look at retirement savings for households ages 55 to 64 these numbers are staggering; 41% of these households ages 55 to 64 have saved zero, zero dollars for retirement. 20% of these households have saved less than $50,000. This poses a great problem of retirement doesn’t it when over 60 percent of Americans have less than 50,000 saved for retirement and most of those have 0? Only 9 percent of those household ages 55 to 64 have saved over half a million dollars.

Start Now

Here’s the lesson here for those of you who are younger and have time start saving now. Don’t wait until you’re 40, don’t wait until you’re 50, start saving now.

Think about this idea of having a long-term goal and making decisions in light of the long-term goal, delaying the gratification. I’m willing to bet that if you consider this idea of present bias, this idea of delaying gratification, you will have more success financially.

It’s always a good idea to work with a certified financial planner. Outside eyes can give outside perspective and can help you make good, wise financial decision that often saves you thousands upon thousands of dollars.

 

Sources:

Federal Reserve Bank of St. Louis

United States Government Accountability Office, 2015

Posted by Erik Garcia on Oct 26 , 2018

Erik Garcia
Erik is a New Orleans based Financial Advisor offering financial planning and fee based investment advisory services. Since graduating from Tulane University’s A.B. Freeman School of Business in 2001, Erik has worked with a wide range of clients from entrepreneurs to individuals and families specializing in helping them make smart financial decisions regarding savings, debt, and insurance as well as helping them make wise investment choices. Erik believes financial success is not only due to successful investing but more importantly healthy attitudes and behaviors towards money.