The High Value of Delayed Gratification
Posted on June 30, 2006
Have you ever noticed how some people who are working the same jobs and making the same money as others are living surprisingly different standards of living? They may be driving bigger cars, living in nicer homes, wearing better clothes and have money in the bank while the others are struggling and in debt. Surprisingly, it’s often the ones who are struggling that seemed to have the most going for them in the beginning.
Your first reaction may be that those doing the best are better money managers than the others. That may be the case, but it could also be something as simple as the fact that they have learned the high value of delayed gratification while the others haven’t. If you’re wondering what I’m talking about, let me explain.
Let’s assume you made a purchase costing a little over $23,500 and financed it for 60 months at 10 percent interest; your payments would be about $500 per month. By the time you paid off the loan, you would have shelled out $30,000 of your hard earned income to buy a $23,500 item and your purchase would be five years old. On the other hand, if you had put the same $500 per month into an investment that earned 6 percent interest for the same 60 months, with the interest it would earn, you would accumulate nearly $34,900 or enough to pay cash for the $23,500 item and still have $11,400 left in the bank. The difference of $11,400 is the high value of delayed gratification, or stated another way; it’s the price of impatience.
You may have heard that patience is a virtue. What you may not have heard is that patience is money, and lots of it. Many good hard working people pay enough in interest and finance charges over the course of their lives to become millionaires�all because they haven’t learned the value of patience. This is something that we aren’t teaching in our homes or in our schools.
Our financial system encourages an “I want it now!” mentality. We are bombarded with every buy now pay later opportunity imaginable. Our mailboxes are stuffed with offers for credit cards, home equity loans and other types of loans. Pay day loans have become big business in spite of exorbitant interest rates. Before you get caught is a trap that drains your buying power and lowers your standard of living, stop and think about the effect it will have on your long term standard of living.
When you save for big purchases, the interest you earn on your savings becomes a discount off the purchase price. If you finance these instead, the interest you pay becomes an increase in the price. Why will people wait until an item goes on sale in order to save a few bucks, but they won’t wait until they can save enough to pay cash, which often results in even bigger savings?
Here’s a tip! The next time you get an urge to buy something and you don’t have the money to pay cash for it, try this. Determine what the payments would be and how long it would take to pay off the loan if you financed the purchase. This could be a separate loan or a charge to a credit card. Either way, you need to know what you would have to pay and for how long.
Then ask yourself, “Is this something I really �need’ or do I just �want’ it now?” If you’re honest with yourself, you’ll find that most purchases are wants not needs. In other words, you could live without them for a few months if you had to. There are very few things that are truly needs other than food, clothing and shelter.
Once you’ve determined how many months it will take to finance a purchase, then divide the purchase price by the same number of months and see what you get. Without the interest or finance charges added, you’ll find that the payment is considerably lower. In the example we used earlier, the item costing $23,500, which would require payments of $500 per month for 60 months if financed, would only take $391.67 per month to save that much even if you put the money under your mattress and didn’t let it earn any interest. That’s a difference of $108.33 per month, every month, for 60 months, but it’s even more if you add the interest the money could earn by investing it until you got ready to make the purchase.
Here’s another way of looking it. If you saved $500 per month, which is the amount of the payments you would make if you financed the purchase, it would only take 47 months rather than 60 for you to own the purchase free and clear. Again that’s assuming you put the money under your mattress and it didn’t earn anything while you were saving.
Can you see the high value of delayed gratification? Can you see that whether it’s large purchases or small ones, it takes less earned income if you will save for the purchases rather than financing them? The only thing gained by financing is time, but it comes at a very high price and often gets people into a cycle of debt from which they may never be able to fully recover. So the next time the urge hits you, think before you act, or should I say react!
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