Many times when you read personal finance blogs everything you read is about not doing this or that, never spending money, and generally living like a hermit. That’s not my idea of a great life.
Is it yours?
Probably not. And that’s okay. That’s great, actually. No one wants to live in a shack in the woods with no electricity and never speaking with anyone from civilization.
On the other hand you can’t live like a rockstar all of the time and just spend money on whatever you want, racking up an unsustainably high level of credit card debt. If we are honest with ourselves I think we all lean more toward the rockstar lifestyle than the hermit lifestyle. And that’s a problem.
Some reports show that 7 out of every 10 households in the United States live paycheck to paycheck. That means if something happens with your employment — whether that is a layoff, a furlough, or you get fired — your family is immediately at risk to lose everything they own to debt collectors and bankruptcy.
What leads to this lifestyle? A contributing factor is often not understanding delayed gratification.
What is Delayed Gratification?
The concept of delayed gratification seems to be rare in American society. It is what it sounds like: you want to spend money on something that would be gratifying to you — something you would enjoy — but instead of spending money on it now, you wait to spend that cash on it later.
For our uses, what this means is instead of grabbing your credit card with the biggest credit limit to go buy that television you instead wait and save up the money each month until you can afford to pay cash for the item. (You can still use the credit card to buy whatever it is you want as long as you pay the balance off that month; essentially treating your credit card like a debit card.)
How Can Delayed Gratification Make Me Wealthy?
This process of delaying your gratification can save you thousands of dollars per year depending on how much money you are spending that you can’t afford to spend.
Delaying gratification by avoiding credit card debt will save you on high interest charges for whatever you spend and hold a balance on the card for. If you put $5,000 worth of home theater spending on a credit card — like a television, sound system, and so on — you will end up regretting it. A credit card balance of $5,000 at 18% with a 3% minimum payment will have an initial minimum payment of $150. If you pay $150 per month on the balance it will take you 3 years and 10 months to pay off the full debt. That is 46 months of payments. During those 46 months you will not only pay back the $5,000 principal balance, but also an additional $1,836 in interest charges. You will essentially buy that home theater system and spend an additional 36% of another home theater system.
Alternatively, you could set aside that $150 per month for 34 months and pay cash for that $5,000 worth of home theater equipment. Yes, that is more than 2.5 years away, but you get back 12 months of payments as well. If someone offered to save you over $1,800 on a $5,000 purchase, wouldn’t you take it?
4 Steps to Using Delayed Gratification to Build Wealth
Here are four steps to taking on delayed gratification.
Stop Spending Money You Don’t Have
For starters you absolutely have to stop spending money you don’t have. That means putting a stop to instant gratification today. You can’t begin to repair your financial situation if you keep digging yourself deeper into a debt hole.
Get Out of Debt
Now that you’ve stopped the bleeding of adding more debt, you need to begin to chip away on your debts. Whether that means sending in an extra $20 per month to start or an extra $100, get started now. Hopefully you have extra money left over each month because you’ve stopped instant gratification. Use those funds to beat back your debt. (If you have no extra money each month, you need to cut further, earn more income, or preferably both.)
Wait Before You Buy
Once you are completely free of all debt (save a mortgage), you can begin to look at things you want to buy. I’m sure this will be easy because marketing departments everywhere have the uncanny ability to make things like an electric toothbrush seem like the most amazing purchase you’ll ever make, not to mention things you actually want to buy.
Here’s the kicker: you can look and every create a list of things you’d like to buy, but you can’t buy them today unless you have the money already set aside. Since you just get out of debt, you shouldn’t have any money set aside for anything. So create your list, but wait. Put the credit card away; don’t spend money you don’t have.
Save Up for Your Goal, Then Buy It
Now that you know what you want and approximately how much it will cost, start setting aside money each month to pay for it. Want to buy something that costs $1,200, but only have $100 per month to set aside for it? You mut force yourself to wait a year to buy it.
This is also assuming that the money you have leftover each month for future spending goals is separate from money you have leftover to save for an emergency fund and other important goals. In other words don’t get out of debt today and set aside every last penny for spending if you don’t have a rainy day fund first.
2 Extra Perks of Delayed Gratification
There are two additional perks to taking on the delayed gratification mindset.
First, the item you want may drop in price the longer you wait to buy it. This is especially true with electronics. (Of course the TV manufacturers are always coming up with the next latest and greatest with a higher price tag, too.) But if you can stick to being happy with the original item you selected to buy, the price will slowly drop over time. This saves you money and time because you won’t have to wait as long to buy it.
The second perk is you may surprise yourself and decide a few months into saving up the money that you don’t really need or want what it is you are saving for. Again, marketing departments want to create an urgent desire within you to buy that shiny new item right now because it won’t be around tomorrow or because it is so useful today, how could you possibly live without it? That urgency leads you to grab your credit card and buy that shiny item right this very second. But if you wait a few days or months, you might find that you don’t really need or want that item. And that’s the best way to save cash with delayed gratification.