In the world of finance and money management, the allure of instant rewards often clashes with the wisdom of delayed gratification. Humans are hard wired for pleasure and instant rewards. Thus, the choices we make regarding our money are often a conflict between our desires and the need to put off immediate pleasures for long-term gains.
Let’s explore the role and benefits of delayed gratification in the realm of money management and investing.
Delayed Gratification and Financial Decision-Making
The tendency towards instant gratification often plays into our day-to-day decisions. When we encounter something appealing, the impulse is often to indulge immediately. However, embracing delayed gratification -- a bedrock of sound money choices -- can pave the way for enhanced financial stability and, in turn, robust financial future, says Harshvardhan Roongta, a certified financial planner at Roongta Securities Pvt Ltd, a financial planning & wealth management consulting firm, in Mumbai, India.
“If you find yourself inclined to spend on something that falls more on the side of ‘desire’ than ‘need’, it's advisable to take a step back and take some time to contemplate,” he says. “Consider taking a day or two to reflect on whether the purchase is truly essential at this moment.”
Moreover, it is prudent to evaluate if the purchase is within your financial means. “If the desired purchase fits your budget, then it can be considered,” says Roongta. “However, if it exceeds the budget, a more thoughtful assessment may be necessary.”
A lack of proper budgeting leads to overspending, he contends. It is crucial to weigh your financial decisions carefully—whether to make the purchase immediately or defer it for some time.
Temptations Abound
In today’s highly commercialized world, from glitzy malls to blowout online sales, consumers face constant temptation to live beyond their means. Hence, the importance of practicing delayed gratification couldn’t be overstated.
Roongta advises making conscious effort to avoid exposure to areas of heightened temptation. “One of the key recommendations we emphasize is curbing the influence of push notifications from mobile apps, particularly those from popular online platforms like Amazon,” he says.
Frequent notifications are designed to create a sense of urgency with limited-time offers and fuel the fear of missing out (FOMO). “Disabling these notifications eliminates the constant temptation to make impulsive purchases,” he adds.
Additionally, when it comes to using credit cards for shopping, especially when alluring deep discounts are in play, restraint and thoughtful budgeting are of critical importance. Roongta recommends setting aside an equivalent amount in cash you want to spend on any special offers. “This ensures that the funds are earmarked specifically for the purchase and are removed from the cashflow beforehand,” he says.
This makes it easier to pay the credit card bill in full. If the credit cycle extends beyond the current month, allocating the necessary funds ahead of time ensures that the financial consequences are addressed promptly and do not spill over into the next month, Roongta says.
“By taking this approach, individuals refrain from falling into the 'spend now, worry later' trap,” he asserts. “We've seen a drastic change in the behaviour of people when they start doing that forcibly.”
Delayed Gratification and Financial Stability
In today’s financial landscape, the approach to money matters has changed significantly, especially among Gen Z and millennials. This you cohort is more inclined towards experiential spending, living in the present, without giving much thought to the future.
For such a mindset, a strategic approach must be applied that involves assigning tangible numbers to financial decisions, says Roongta. To those entering the workforce, his crucial piece of advice is to “allocate a minimum of 20% of your income towards future goals.”
The remaining 80% of the income accounts for recurring expenses, a buffer for contingencies, and discretionary spending. By following the 20% allocation rule, individuals can gain the freedom to spend the remaining 80%. This simple yet impactful allocation strategy establishes a strong financial foundation, underscoring the impact of modest monthly investments.
To drive his argument home, Roongta illustrates with real numbers, highlighting the magical interplay between compounding and early start on saving. If an individual, he says, saves and invests ₹1000 each month for 30 years, his principal investment of ₹3.60 lakh at the end of the term will have transformed into an impressive ₹54 lakh, assuming an annual growth rate of 14%.
However, delaying the decision to save and invest by just five years would yield ₹26.5 lakh, less than half of the amount accumulated with an early start, assuming all other variables remain constant.
This is the message Roongta tries to impart to the younger generation. “I'm not suggesting curbing personal spending – that's certainly not the goal,” Roongta says. “Instead, it's about allocating a specific budget for every aspect, including a dedicated 'spoil yourself' budget.”
Managing Instant Gratification Impulses
Budgeting plays a crucial role in managing instant gratification impulses. Allocate 20% for medium to long-term goals, create a buffer for unexpected expenses, and allow discretionary spending with only what's left over. Without a well-defined budget, nothing truly progresses, says Roongta. “Unless you have a broader game plan of what you're going to do and what you require, there is no way you are going to put anything into it,” he says. “Without specific numbers you’re dealing in vagueness, because you have no Idea of what's needed.”
If someone wants to save for retirement but can't quantify how much is needed, they are bound to fall short. “When you put numbers to your goals, you realize that more funds are required than initially imagined,” cautions Roongta, but adds, putting numbers to your saving goals “naturally [curbs the impulse for] instant gratification.”
This is not to say one can’t spend on themselves and enjoy their wealth because “what you can do today, you may not be able to do later in life,” he notes. “One has to be mindful of their priorities. “ Another way to rein in temptation to splurge at malls and online shopping websites is to take a pause between the initial thought and actual action. Take some time to reflect on whether it's a genuine need or a want, and consider your financial standing. This leads to well-informed spending decisions. “That is the only trick,” Roongta says.
4 More Ways to Combat Spending
Here are some spending and saving tips from Morningstar specialists, contributors, and guests, collated by Morningstar writer Carole Hodorowicz.
Tip 1: Be You, Spend Like You
Jill Schlesinger, author and business analyst for CBS News, joined Christine Benz and Jeffrey Ptak on The Long View podcast to discuss how people can achieve a better financial quality of life. When the topic switched to spending and budgeting, Schlesinger points out that it really depends on your personality: "If you go through the process of actually looking at how you are really spending your money, it can be embarrassing. You can put the fun category and just put it out there and try not to judge it.
"Sometimes I’ll tell people to cut back on the analysis and have some fun and spend your money. Because life is short, and that you want to have some fun and you want to have fun along the way. So, what works for you, works for you, and I don’t have a preference one way or the other."
Tip 2: Give Your Money Purpose
Giving your money purpose can help you understand your feelings about how you spend. This episode of Investing Insights with guest Kiersten and Julien Saunders, hosts of the rich & REGULAR podcast touches on why this is so important:
"People who have far more measurable financial wealth than we do come to us asking us for tips on how to live. They don’t quite know. They haven’t learned how to spend. They haven’t learned how to nurture relationships. They have fractured marriages. They have all of these things. They’re suffering from mental health issues, and they don’t really know how to unwind because they spent decades accumulating money. But they have no real way to make a life of it. For me, it’s a matter of knowing how to turn that part off, get outside, which has been a big thing for me, just sort of reconnect with the broader world and use all of those things to create the lifestyle that we have come to appreciate."
Tip 3: Do the Math
Determining your Golden Ratio is one way to figure out how you spend. Behavioural researcher Sarah Newcomb breaks it down:
"Your Golden Ratio is made up of three numbers, representing the percentage of your gross income that goes to:
- The Past: paying for things you bought/did in the past;
- The Present: funding your current lifestyle;
- The Future: accumulating to create future income.
Someone earning $60,000 per year who saves $500/month (the future) and has debt payments of $500/month (the past) would have a Golden Ratio of 10 | 80 | 10. Ten percent of every dollar they earn goes toward debt, 80% is consumed in the present through taxes, groceries, rent, and everything else, and 10% is saved for the future.”
Tip 4: Write It Out
Is an Excel spreadsheet not your jam? Use our budget worksheet instead.
