Can You Overcome Instant Gratification Urges and Get in Control of Your Finances?
The media constantly bombards us with messages saying that we can instantly have whatever we want and not only that, we really do deserve it. The oft repeated commercial jungle sums it up nicely with "You deserve a break today." Every day, advertisers spend million of dollars trying to convince us that all our aspirations can be met and are within easy reach. This selling technique touches all aspects of our lives. Eating too much or need to improve your diet? Not a problem, take a pill for instant stomach relief or weight loss. Advertisers are very good at convincing us that there are in deed, magical solutions for all of our needs and wants. Stressed out? Go on a cruise to ease your mind... and not six months from now when you have saved up the money for it... but take the cruise tomorrow and just put it on your credit card! This type of persuasive advertising has effects beyond the individual good or service being sold. Most people in our society have an overdeveloped sense of self-indulgence; an "instant gratification" attitude. We expect constant and immediate gratification from our interactions with service providers, employers, and even family and friends. A famous experiment was conducted where 4 year old children where given marshmallows. Each child was individually taken to a room and given one marshmallow and told they could eat it. But, the experimenter said, I'll return in 5 minutes, and if you still have the marshmallow when I get back, I'll give you another marshmallow. Its up to you, eat your marshmallow or save it. The experimenters tracked the lives of the children afterward. The main conclusion: the children who did not eat the marshmallow were more confident, has more friends, earned better grades, and got better jobs. But are we really surprised by this result? We have become a nation that can't resist eating the marshmallow, and like those 4-year-olds, we'll pay a price down the road. Starting soon, the boomers will desperately need the second marshmallow. Trouble is, they've already eaten the first one. (Fortune Magazine) America's savings rate has plunged to the lowest level in history. Statistics show that in the past few years we've saved between 1% and 2% of income. That means we"re spending 98% to 99% of everything we earn (and in some cases we are spending more than 100% of our income by using credit vehicles such as credit cards, lines of credit and loans) to finance our perceived needs, and then we are shocked to find our retirement is in trouble or not possible when we had hoped. This is beyond poor judgment. It's just self-delusional. Keeping in mind that the average life expectancy is getting higher and that the basic cost of living constantly increases, we are definitely not in a good position (as a society) for the future. Yet we continue to save minuscule amounts for our future, or nothing at all. We have a hard time believing that tomorrow really will come, and a day of awaking to our financial reality will soon be ours. Presumably, we live beyond our means in an attempt to obtain a measure of comfort and happiness in the midst of a stressful lifestyle. Anyone who sits down to try and understand happiness will understand that an instant gratification attitude does not contribute to lasting peace and happiness. In fact, developing a mind that is constantly looking for the next "need" to be met by others leads to an insatiable appetite for instant gratification... bringing unpleasant after-affects which almost always outlast the quick fix. Here is a somewhat typical scenario: A husband and wife both work at good paying jobs, where together they earned in excess of $100,000/year. However, they live in the husband's parent's basement and have their credit cards and lines of credit maxed out. Of course they enjoy their big screen TV and a nice, expensive stereo system; they drive new luxury cars and have, what seems to everyone else, a very luxurious lifestyle. But, it's all a facade. When asked about one of his recent purchases, the husband replied, "Hey man, we live in an instant gratification world." Many of us do not follow good financial principles just to satisfy our societal programming; the craving to keep up with the Jones'. While many people just make poor choices, this problem often boils down to a lack of good financial planning education. Financial planning is one of the most critical issues we all have to deal with as adults, but its noticeably absent or only lightly treated in schools. For the most part, we get our financial education by observing the behavior of our parents, and unfortunately, most parents are not in a good stead themselves to be able to teach by example good financial planning skills. Individually, we need to get back to financial basics. These basics boil down to a few things: Live within your means (spend less than you earn and use a budget) Understand the difference between good and bad debt and get rid of bad debt as quickly as possible Differentiate between needs and wants. Learn to ask yourself before purchases, is this something I need or want. Make sure you take care of needs first, then wants can be addressed when your savings support them. Living Within Your Means Living within your means, now almost a cliche statement, means that you plan to spend less than you earn. When you do this you plan for success. The phrase "live within your means" is one championed by prophets, personal coaches and financial planners; an exhortation that usually goes unheeded, to its hearers financial doom. Lets examine a typical personal/family budget. Income is listed at the top, with expenses below and finally we see the difference: your net income. If your net income is a negative number (meaning you have more expenses that income for a given month) or below a comfortable threshold you have only a few options: Make more money Reduce expenses Too many of us are choosing the hidden third option and borrowing money to cover the difference without rectifying the problem for the long run, thus building a debt load that will never be paid off until a fundamental change takes place. These 2 options are easy to read but actually making a change there is a different matter. Most of us cannot simply go and earn more money, so we are left with reducing our expenses. The problem is, we are conditioned by our society to believe that we deserve the latest, greatest things, that somehow we are poor or inferior if we don't have the things that our neighbors have. However, if you recognize this conditioning, you can get back in control and realize that you are in control of your spending. You'll find you can change your spending in many ways to save more, to reduce your debt load, to donate to your church or charities, to do whatever worthy thing we want to. One of the keys to living within your means is the ability to differentiate between good debt vs. bad debt, and wants vs. needs. Once you learn that, the rest is a simple matter of character (defined as "the determination to stick with a decision after the excitement of making the decision is over"). Good Debt vs. Bad Debt Until we are independently wealthy, we all need to borrow money to get ahead in life; there's no escaping it. When borrowing money (taking on debt), its important to understand the difference between "good debt" and "bad debt" and avoid bad debt whenever possible. Bad debt is borrowing money for something that becomes less valuable over time (depreciates). Most regular purchases fall into this category. Think about some of the things you buy: an automobile, a television, a computer. These items are worth less as soon as you walk out of the store with them and as time passes they become worth less and less. A sure way to stay poor or middle class is to buy lots of things that depreciate. If you want to build wealth, you should try to buy things that appreciate. However, since we all like some things that depreciate, you should at least plan to not buy these items with borrowed money. Purchasing "bad debt" items with borrowed money always puts you in a losing scenario. Here's how: You are acquiring an item that immediately loses value and gets worse over time, such as a car and you use debt to pay for it - a loan in this case. You'll never get that money back. If you fall on hard financial times, you cannot simply sell the car to pay off the loan since the sale price of the car will always less than the original purchase amount, and often less than the remaining balance of the loan. That car loan is charging you interest, as borrowed money always does. Interest is always throw away money that you'll never get back - the cost of the convenience of spending money before you actually have it. It doesn't take a genius to see that borrowing money for bad debt items never makes sense. Now, sometimes bad debt will be forced upon you, but as much as possible - avoid it like a disease. To avoid it, you must be careful to differentiate between wants and needs - waiting for the wants until you have saved enough money to pay cash for these items only when you determine you can actually afford it. Then, at least you are not throwing away money on interest and there is no risk of being left with a debt if hard times come. On the other hand, good debt is borrowing money for something that becomes more valuable with time or improvement (appreciates). This can be property, education or fine art, for example. Items like these are more valuable when you try to sell them in the future. For example, you sell your education by applying on the job in exchange for money. You can normally sell a house for more money than you paid for it, since property typically appreciates in value. Debt is good whenever the value of the item you financed increases with time. In conjunction with that, the appreciation of the item should be greater than the interest incurred for borrowing the money. For example, if you buy a house for $250,000 at an interest rate of 7%, and you find that the house value is appreciating at a rate of 10%/year, wonderful! However, if you find that the value of the house is growing only at say, 3%, then your "good debt" isn't so good after all. In this case, you are still losing money after everything is calculated. Note, this is still much better than bad debt because, if needed, you can sell that house and pay off the debt in its entirety, but its definitely not ideal. So, the conclusion here is, borrow money for good debt items, but not for bad debt ones. When you have to (want to) buy something that depreciates, plan to save the money first and pay with cash. This may be difficult for big items, such as a vehicle, so you have to be careful to distinguish between needs and wants. You should never buy the big screen TV on credit. Bad, bad bad. Needs vs Wants Our true needs consist of food and shelter and associated things. There may be a few others depending on where you live, your religion, etc... but you should not feel that you "need" the big screen TV. I heard it said the other day that all guys need a big screen TV. Of course it was said as a joke, but it highlights the attitude many people have. We confuse our needs with our wants and end up being unable to prioritize our spending effectively. You should always prioritize needs before wants when planning your budget and spending. Once your needs are taken care of, you can determine if you have enough money leftover to buy some of your wants. Wants should be purchased with cash - not on credit. So guys... you have to control that desire for the new electronic toy until you have enough money saved up to afford it. Don't get sucked into the blackhole of credit because debt is a constant companion and will wear down on you, and it is very difficult to get rid of. Application of these basic principles will keep you, your family and your budget happy and get you on the road to a positive financial future. Eric Poulin is the co-founder of CalendarBudget an online money management tool. Eric also has a blog [http://blog.calendarbudget.com] with other money management tips.
