We are all guilty of making decisions that aren’t in our best interest; it’s just human nature, I guess. So it figures that we also make decisions around money that impact negatively on our financial security.
The consumerism of the current financial climate drives us to acquire more and more ‘stuff’, whether we really need it or not. Over-spending has become a way of life, cheered on by financial institutions and credit card companies, who want us to spend up big so they can earn ever more interest, at our expense. Let’s look at something that can help turn this around. It’s called the concept of delayed gratification.
Scientists have discovered that hormones come into play when we are making certain buying decisions, and we all know that logic goes out the window when we are driven by hormones. These hormones affect our emotions and so we end up making a buying decision based on emotions. We know what a disaster that can be! Apparently, when we are faced with buying decisions, we experience similar hormone activity to the fight or flight mechanism in the body. That explains a lot!
So you see, it’s not our fault that we impulse buy and spend money on things we don’t really need.
I bet that makes you feel better!
Over-spending is one of the main causes of financial woes. We become very good at justifying why we have to buy something; we can come up with a hundred very good reasons why we ‘need’ that item. The hormones cut in, emotions take over and before we know it, we have bought something else to clutter our home or closet.
Now admit it – you’ve got something in the back of your closet that you bought on impulse and have never worn or used! I know I have and when I asked a few friends, they all admitted to the same thing.
Easy access to credit has helped to make this process so easy; we don’t even need to have the cash. So, we are driven by hormones and emotions when faced with that gorgeous pair of designer shoes on sale at 20% off; we have a credit card (or six) in our pocket; what hope do we have of leaving the store without them?
Let’s talk about this delayed gratification idea. Simply put, it means that we learn to wait for some things but the reward is worth it in the end.
You probably learnt about delayed gratification as a kid – you have to wait till Christmas morning to open the presents; you can’t eat the candy in the supermarket until after it has been paid for; you can’t watch TV until you have done your homework. Unfortunately, most of us lose this skill when we have to make our own decisions as adults.
In one experiment, neuroeconomist, Paul Glimcher of New York University wanted to see what it would take for people to willingly delay gratification. He gave a dozen volunteers a choice: $20 now or more money, from $20.25 to $110, later. On one end of the spectrum was the person who agreed to take $21 in a month—to essentially wait a month in order to gain just $1. In economics-speak, this kind of person has a “flat discount function,” meaning he values tomorrow almost as much as today and is therefore able to delay gratification. At the other end was someone who was willing to wait a month only if he got $68, a premium of $48 from the original offer. This is someone economists call a “steep discounter,” meaning the value he puts on the future (and having money then) is dramatically less than the value he places on today; when he wants something, he wants it now. The $21 person was, tellingly, an M.D.-Ph.D. student. “If you’re willing to go to grad school for eight years, you’re really willing to delay gratification,” says Glimcher.
More revealing was the reason for the differences. To measure brain activity while people considered whether to delay gratification, researchers slid their subjects into functional magnetic resonance imaging (fMRI) machines. The scientists found that activity in two regions—the ventral striatum, tucked deep in the brain, and the medial prefrontal cortex (PFC) right behind the forehead—closely tracked people’s preferences. In someone who was offered a choice between $100 today or $100 next week, activity in these regions plunged when the next-week choice was considered, and fell even more as the payoff was postponed further and further into the future. These are spend-it-now, to-hell-with-tomorrow people who seek immediate gratification. In other people, however, activity in the ventral striatum and medial prefrontal cortex activity was the same whether they were thinking of having money today or down the road—indicating that they were just as happy either way.
Learning to apply the concept of delayed gratification is vital to achieving financial security, to build wealth or establish a healthy nest-egg for the future. Very few people can really afford to buy everything they want, no matter what they tell you in the ads! We need to learn that some things are worth waiting for, especially if it means we can avoid going into debt.
So, how do you learn to put delayed gratification into effect?
One of the biggies is to be able to tell the difference between a ‘want’ and a ‘need’. When you think about it, most impulse buys involve a want not a need. Try and control ‘wants’ spending and you’ll have more for saving.
We’ve said it before but we’ll say it again – create your own budget so you always know how much money you have for spending on ‘wants’. You need to indulge yourself from time to time; you’ve worked hard for your money and you deserve to buy things that you enjoy. The trick is to avoid impulse buying; be sure you really do want those shoes!
There are always going to things you want – a new car, a new kitchen, an overseas trip etc. Rather than buy these things on credit, set out a savings plan that will see you wait a while but then be able to enjoy them, without the debt that goes with using credit or taking out a loan. When you have a goal like this, it is easier to stay on track with saving.
Make better buying decisions – do you really need a new car or would a second-hand one do? Do you really need a four bedroom house if you are a couple with no kids? Would a small refrigerator do you, as a single, instead of that huge one with the icemaker? Do you really need those expensive Italian sofas or would something cheaper be just as comfortable and stylish? Start out small and simple; you can always upgrade in a few years when you can more easily afford the fancier things.
Another advantage of using delayed gratification is that you can often get a better deal because you didn’t rush into a purchase. Doing some intensive research before buying is actually a form of delayed gratification that can save you money. Shopping around is part of the fun and you get to see different designs and models that you may not have considered. Also, make sure you don’t pay for extras that you don’t need.
Finally – and this is a hard one – be prepared to walk away. Before handing over your hard-earned cash, ask yourself if this is a good buying decision. If you aren’t absolutely sure, walk away and think about it. You can always go back if you decide to buy later on. I read somewhere that you should wait 30 days before making a decision to buy; if you still want it after that time, go buy it.
Like any habit, mastering the art of delayed gratification takes practice. You will get better at it over time and will really appreciate the positive effect your new habit will have on your financial security.
So, what kind of spender are you? Do you go for the instant feel good feeling, or do you wait to feel good later? If impulse spending has been an issue for you, what kind of things have you done to break that habit? Or, if you are good about waiting until later for an item, what is something you have done that has helped you be successful at this? I would love to hear your story.
It’s interesting to learn the connection between our impulse buying and our hormones. The Glimcher Experiment is very interesting, and one that I had never even heard of until now. I’m definitely in the $21 in a month group.
I always find studies like this interesting. Neuroscience fascinates me. Our minds have so much power, literally.
It is probably part of my personality, but I build in ways to avoid immediate gratification. I try never to go shopping unless I have a list. I also always research the purchase for purchases over $X. I started doing online sopping because I can use shopping bots to find the lowest prices. It is also automatic delayed gratification.
Very cool. I have been meaning to try out one of those shopping bots. I also do a lot of online shopping and it would be very handy. Which one do you use?
Great points! I went with mastering my ‘wants’ – otherwise I am like Oscar Wilde (I can resist anything but temptation).
Mastering your wants- I like it. That really is where we should focus. It is the wants that get us into trouble.
Impulse buying/emotional spending….such a trap! I use delayed gratification all the time…it really does work. If I still “need” it a few days/weeks later, I’ll splurge, but I find that it doesn’t really happen that way for me very often. I usually realize I don’t “need” the thing I really wanted.
I have been trying that too. When you wait you are able to think a lot more clearly about the purchase. Your emotions aren’t tied into it.
I normally wait to buy things so I can do research and find the best deal. Now I have a smartphone which will allow me to research faster but I will still probably wait. I am so indecisive…
I often use the Amazon app on my smart phone to compare prices when I am at the store. It works well and often online is cheaper.
Awesome post. There is really a big difference when we understand the issue in a scientific perspective. It gives a better sense of control over ourselves by knowing our nature.
I think so. The more we know about ourselves, our strengths, and our weaknesses, the better off we are in making decisions. We can be self aware and use that to guide us.
This reminds me of a friend of mine who was going overseas to study. Just before she was leaving Barbados, there was a Rihanna concert and she paid $500 to go VVIP and was later saying that she did not have enough money. Another friend told her that buying the ticket for $500 was downright stupid and she should learn how to put needs before wants.
I think many of us have made this kind of mistake in our younger years. Those emotions get the better of us. The key is to learn from it though. Hopefully she has learned her lesson and changed her ways.
Great post 🙂
Glad to hear you have a frugal side Jeremy. That will definitely help you going forward. Glad to hear you are in the $21 group. I am too.
I’m someone who believes in delayed gratification, or perhaps better put: being happy with the basic needs met. Once the basics are met, then the excitement and fun stuff can happen. It’s a safe and practical way to manage finances and have peace of mind.
Exactly. Life is much better when you don’t have to stress about where the next dollar is going to come from. I think we would all feel more fulfilled if we practiced the lifestyle like yours. Peace of mind is a wonderful thing.
Ha! We were just talking about this today. OG’s friend accepted a $30k buy-down to go from $17 to $12 a year ago. Of course, now that the money is gone, he’s saying he shouldn’t have taken it. I think at the time he didn’t think about $12 an hour. He had his eye only on the $30k.
It is all about perceptions if you ask me. Things aren’t always as they seem and if we don’t pause and think about stuff than we get burned. Delay is the key word here. Don’t do anything in a rash manner and you are typically better off.
This makes me feel a bit better about impulse spending! I’m still less than a year from my last birth, so my hormones are still all crazy. Don’t suppose I can blame impulse spending on that for a bit longer? 😉
Probably not but I will give you credit for a good try. The key is balance. Remember impulse does not imply balance, it implies imbalance. If you manage things in a balanced way you will almost always be ok.