Mastering your finances, like mastering a sport or a skill, requires discipline, dedication and patience. One of the first disciplines to learn is that of delayed gratification.
It’s natural to want something straight away. Your neighbours have a new large-screen smart TV. You want one too. Your lounge suite is starting to look worn and outdated – a newspaper supplement from a furniture chain is advertising a new one, to your taste and style, for just over R600 a month, which you can acquire immediately.
Big retailers with large advertising budgets rely on this “instant gratification” factor to market their products, and through the media they bombard us with the message that it’s okay to have everything NOW. Besides, your friends are doing it.
But it’s not okay. The retailers are taking you and your friends for fools. They have just one objective: to get richer.
And you will get poorer. Instant gratification can be costly.
The cost of credit
The lounge suite I mentioned above is on offer currently from one of those big furniture chains who specialise (and make a killing from the uninformed) in selling on credit. You can pay it off over three years at R643 a month, which amounts to R23 148. If you pay cash, it's R9 999. That's a difference of R13 149. The interest rate charged, at 25.25% (in small print at the bottom of the page), is shockingly high, considering inflation is about 4.5% and the prime lending rate is 11.5%.
If you put away that R643 each month, taking into account that the lounge suite may cost a little more by then, you could buy the suite cash in 18 months. You'll have to live with your old couch and chairs for a while longer, but you will have saved thousands.
Let's say you do that, but continue putting away R643 for another 18 months, as if you were paying it off, in an investment with a reasonable return of 9% a year. You would then have R12 434. Without contributing another cent, after another seven years (10 years in total) your money will have almost doubled, to R23 291. Forget about it for another 10 years and you’ll have R57 094.
Let’s take this a step further and see what happens if you decide not to buy the suite at all, and put R643 a month into an investment from the start, stopping contributing after three years but letting the money sit there and grow.
After three years you would have R26 659. After 10 years it would have grown to R49 937 and after 20 years to R122 413. That’s just from not buying a ten-grand lounge suite.
“What about inflation?”, I hear you say. If we take the real rate of return of 4.5%, which is the actual return minus the inflation rate, after 20 years you will have R52 274 at today’s rand value.
You’re making compound interest work in your favour, instead of against you.
So giving more thought to what you want to buy, and then saving up for it (delaying gratification) instead of buying it on credit (instant gratification) is one of the biggest steps you can take towards attaining financial freedom.
The marshmallow test
Research has shown that people who have learned the discipline of delayed gratification early in life tend to fare better in their careers and personal lives than those who haven’t.
In an experiment conducted a number of years ago, a group of four-year-old children were given the following choice: eat a marshmallow now or wait 15 minutes before eating it and then be rewarded with another marshmallow.
The researchers found that about two-thirds of the kids could not resist the treat and ate their marshmallows within three minutes. Only about 30% of the children could resist the temptation and wait for 15 minutes, after which they were rewarded with a second marshmallow.
More interestingly, the research team did a follow-up study of the children some 20 years later, when they were now young adults. How had they done at school and in their lives after school?
They found a high correlation between “high delayers” and success in careers and relationships – in other words, those kids who could delay gratification during the marshmallow test tended to be more successful in their academic careers and personal relationships than the “low delayers”. It was found that many of the “low delayers” struggled with life in general because of behavioural problems, which manifested in poor academic results, employee records and personal relationships.
You can train yourself to be a “high delayer” at any stage of your life. Of course, you need to keep a balance between present and future needs – it doesn’t mean never spending on yourself in the present. But, as far as possible, you should avoid “robbing your future self”, which is what you do when buying on credit.
* Hesse is the former editor of Personal Finance
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