Delayed Gratification

Building Wealth – Part 2

• Building Wealth Part 1 – Developing Financial Knowledge

As humans, we are not trained for “Delayed Gratification”.  That is, delaying the satisfaction of buying something or attaining something new. None of us like uncertainty in life, so we try to remove as much uncertainty as possible. When we are presented with two options – one in which we get to satisfy our desires immediately, and another in which we could potentially get a bigger reward in the future if we choose to delay, but it is not certain – most of us would lean toward the first option where we get to enjoy our desires immediately. 

This means that we keep upgrading our life style as our earnings grow. When we start our career, we stay with 3-4 room mates. In 2-3 years, our salary will double. When that happens, we upgrade from 4 room mates to 1 room mate. Then in another 2-3 years, we get married. At that point, we upgrade ourselves to a one bedroom apartment. Then in another 2 years, we upgrade to a two bedroom apartment. Then after kids, we buy our own home. So depending on our career growth, we keep upgrading our lifestyle. When our expenses increase from our life style upgrades, other expenses add up as well like kid’s school fees and so on. 

It never goes down. When we are at 40, we will come to a sudden realization that we have already crossed half of our life time, but all that is left is just our half mortgaged home as an asset. Only after that point, we start thinking about retirement and investments. But by that time, we will have other responsibilities like saving for kids’ college. Some parents take upon the additional responsibility of saving for kids marriage as well. 

Just like that, our whole life would have just passed. The next generation will follow the same pattern as well. Regardless of how much we earn, we spend as much to match that earnings growth. If we want to break this cycle and move to the next level in builidng wealth, there is only one option – Delayed Gratification. That is, instead of enjoying the life upgrades immediately as we earn more, we can delay it for some time, and use that extra money for our financial growth.

Before we check out how we can do that, an interesting experiment on delayed gratification. 

Stanford Experiment

In the 1960’s, Stanford University conducted a psychological experiment called the “Marshmallow Experiment” with children. They used 3.5 to 5.5 years old kids for this experiment. What they did was, they asked each kid to stay inside a room with a marshmallow on a plate in front of them. They made a deal with each kid – they would leave the room now, but would be coming back after 15 minutes. If the kid did not eat the marshmallow by the time they came back, the kid would get two marshmallows instead of one.

So the kid has two choices. There is a marshmallow right in front of them. Instead of waiting 15 mins for another additional marshmallow, the kid can eat one right now. Or, they could wait for 15 mins and eat two marshmallows instead of one. As we would expect, 7 out of 10 kids did not bother to wait and ate the marsh mallow immediately. But 3 out of the 10 kids, controlled their temptation and waited for the second marshmallow successfully. 

Stanford University did not stop their research at that. They followed these kids for 40 years to see how they did in their life. The kids who waited patiently for another marshmallow generally settled better in their life. They did well in their college entrance exams, did not get addicted to any drugs, did not have obesity issues and they used their self control capability to their advantage. 

What we learn from here is that people who have a strong mindset, do not get distracted easily by short term benefits. They  are very disciplined. They do not think in short term, but they plan for long term and achieve it successfully as well. We will see long term planning more in detail in another post.

Delaying lifestyle upgrades

Coming back to our topic – How many upgrades do we see in our adult life? We upgrade from 4 roommates to 1. We upgrade from 1 roommate to separate apartment. From a 1 bedroom apartment, we upgrade to a 2 bedroom apartment. From a 2 Bedroom apartment, we upgrade to own a house. Even for owning a house, we again upgrade to a bigger home. These are just housing upgrades. We also upgrade our personal vehicles. Starting with public transportation, we upgrade to a motor bike. From a motor bike to a small car. Then to a bigger car and then eventually to a luxury car. 

Many upgrade their perfectly working mobile phones every year just to have the latest phone. We don’t do these upgrades without a reason – we do it as we grow in our career and make more money.

What if we do not upgrade our life styles along with our earnings growth, but delay it by 3 to 5 years? What happens then? The increase in earnings will go directly into our savings rather than for life upgrades. If our savings increases, it enables us to take advantage of more  investment opportunities for long term. If our whole life is 80 years, is it really a big deal to delay our life style upgrades for 3-5 years? We are going to attain all of them anyway. Its just that we are going to do it a bit later.

So, we have two choices as we make more money in our life.

1) Delayed gratification – Delay the upgrades for a while and use that extra savings to build a strong nest egg which will be the foundation for building wealth. or 

2) Instant gratification – We satisfy our desires and inner wants immediately, but compromise on building wealth. 

The choice is in our hand. 

Now we know the benefits that we can get out of delayed gratification at a high level. How can we strategically apply this in different stages of life?  We will look into that in the next part of this “Building Wealth” series.

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Building Wealth Part 3: 4 Phases of Building Wealth