Compared to lower animals or insects, we’ve got this ability locked down. Leave a dog in a room with a piece of tasty meat and a chart showing that dogs earn a 20,000% annual return for any meat left uneaten, and the dog will still choose not to invest. But while most of us can out-strategize our pets, we humans still vary widely in our ability to set aside resources for the future.
This difference in abilities starts to show itself very early in life. My favorite example of this is a famous old psychological study that looked at young children, offering them one cookie now or several cookies in a few minutes. When left unsupervised, some kids immediately grabbed and ate the initial bait, while others exercised their willpower and emerged from the trial with a bigger bounty in exchange for waiting. The results were noted, but the researchers then kept in touch with these children, following through on their lives as young adults.
As it turned out, the pleasure-delayers did better in school, graduated to get better jobs, and ended up in higher-paying careers as adults, with fewer debt problems.
I saw similar results with some of my subcontractors back when I ran a small house building company. One worker in particular would take his payment every Friday, and immediately convert it to cash at one of those ripoff check-cashing places. On the following Monday, he might show up with new accessories on his car and a new pair of sunglasses that were more expensive than mine. He would drive to the fast food restaurants every day for lunch while I ate my peanut butter sandwiches. And long before Friday, he was out of money again.
What is it that separates the instant gratification crowd, and people like Adm Karpinsk, who hasn’t had less than $1000 of just-in-case money sitting around since sometime before age 15? Are the spenders the only ones out there having all the fun, while I sulk at home, worrying about money?
A recent article in NBC news* offered another peek into the psychological differences between the saver and the spender. In that story, a neurological researcher actually watched the brain activity of various types of people, and noticed that those with a better ability to imagine the future in detail were also better at making wise financial decisions like delaying purchases.
That sounded just about right to me, because I am a compulsive future-imaginer. I’ve already got my next several years worth of projects, trips and blog posts mentally mapped out, and sometimes they swim around in my head so much that I have to remind myself to practice the Zen habit of living in the moment and breathing calmly. Fortunately, at that point I get to look around at my present life, and marvel at how exceptionally good it is as well.
And with all this background, we can finally understand the difference between savers and spenders right as they stand in front of the cash register, about to make a purchase.
The future-oriented saver thinks more about the eventual results: “This is something I have decided to buy. It will reduce my monetary wealth, but I estimate that the added life benefits over time will exceed the loss caused by the missing money. I hope so, anyway. ”
More significant is the feeling each person gets when he does NOT make a purchase:
Spender: “Hey! I wanted this thing and I don’t get to have it! Waaaaah, Waaah!!”
Saver: “I just avoided a purchase, and I am richer because of it. Cha-CHING!!”
This has great implications in the often-challenging field of Not Spending All Your Money. The common wisdom is that you create a “budget”, and allocate a certain amount of your money to savings, and the rest to “guilt-free spending”. During the initial period of spending, you get to say, “Yeah! Yeah! I’m buying stuff! Hooray!”. Then when you hit the ceiling in each category, you’re back to “Waaah! Waaaah!”
Adm Karpinsk has always suggested that budgets are only for beginners. They are built on the assumption that the “Yeah!” stage is desirable, and you will only stop when you reach the limit. Take as much instant gratification as you can each month, but cut yourself off before you do too much damage.
Instead, what if you could make the NOT spending just as rewarding as spending feels to the regular consumers? You can, of course, and it’s very easy – it’s just a matter of cultivating your own little ChaCHING instinct.
Every time you don’t spend unnecessary money, you have won a little game. It is a game of becoming stronger, wealthier, more focused on what really matters in life, and more able to do the same thing next time. You have simultaneously both increased your means, and decreased your needs.
Your safety margin and independence in life just grew a little bit, and the entire rest of your life will now be better because of it. Just from avoiding or delaying a single purchase. What a spectacular reward! ChaCHING!!
If you currently need more money, and yet feel like reducing your spending would be an unpleasant deprivation, this article is for you. You just need to work on your Cha-CHING instinct to reverse your idea of what is rewarding. Feel each little win. Compare it to the lifelong drain of a loss. Add up the little wins and watch as they multiply to become enormous.
Think in more detail about the future, and the peaceful feeling of knowing that money is something you will never have to worry about again. Or the giddy feeling of knowing you don’t have to go to work ever again, even while you might choose to do so with great enthusiasm.
The older I get, the more I realize that the future really does arrive on a regular basis. Gifts set aside by the younger me arrive in my current life, and are much appreciated. By imagining your own future more vibrantly, you too might see fit to give some gifts to your future self. You’ll be thanking yourself sooner than you expect.
* While the NBC story was interesting, the reporter seemed to miss a key financial point with this sentence:
“consumers who can really, viscerally imagine how great that new car will smell when they drive off the lot, or how excited they will be when getting the keys to a new home, have a much easier time saving money.”
Sorry, Mainstream Media, but putting aside money for a great-smelling new car is not saving.. that’s just spending in bigger chunks. Investing money into assets that generate passive income that can meet your needs (including the very occasional car purchase) for a lifetime – that is saving.