Sometimes people ask what are the greatest hurdles to overcome when it comes to budgeting and finances. In my opinion, two of the biggest challenges are impulse control and time. Time is the more abstract concept so I’d like to start with it.
A lot of people in our society struggle with time in one way or another. Most of us probably have a friend or co-worker who is regularly late. Many of us know someone who often under-estimates how long tasks will take and struggles to meet deadlines. Many people, were you to ask them for the time and then ask them again 20 minutes later what the time is, wouldn’t know without looking at a clock each time you ask. A lot of us just are not geared in a way which would make handling time a natural thing.
Time becomes significant when dealing with finances in at least two ways. The first is that time is often a multiplier when it comes to budgeting and investing. For example, if you shared a single bottle of wine with friends on the weekend it might cost you just $20. That’s not a big dent in a budget. However, if you purchased a bottle every weekend for a decade the cost is a little over $10,000. Likewise, if you bought a Starbucks coffee every day you went into work, each coffee might be around $5, but ten years of coffees on the way to work is $12,500. Little things, multiplied by time, become big things.
Time’s multiplier can work in our favour too. If you invested $1,000 each month into your retirement fund (and averaged a 7% return in interest each year), after ten years you’d have invested $120,000 and made $50,000 in interest. Your account would hold $170,000 in total. After 30 years you would have paid in just $360,000 while earning $800,000 of interest and the account would hold a total of $1,100,000 (1.1 million dollars). Time’s effect on the interest payments is significant.
It is difficult for most people to intuit these lengths of time and their effect. Most of us think in terms of today, tomorrow, maybe next week or next month. However, when talking about budgeting, retirement, and mortgages we’re often looking at larger scales of time that can span decades. Since most of us don’t naturally think of these sorts of spans of time or the implications for money (especially compound interest on loans and investments) it’s important to stop and run the calculations occasionally.
Also on the subject of time, most people in our society have a habit of dividing their focus between Now and Later. Most of us want to eat now, we want to enjoy life now, we want to buy things now. Some of us will make plans for later or save up money to buy expensive items later, but the delayed gratification rarely comes to people naturally. Which brings us to impulse control.
There is a famous experiment called the Marshmallow Test in which a child is given a single marshmallow and told that if they hold off eating it for just a few minutes, they’ll be given a second marshmallow. Or they can eat the current one right away and get nothing later. Some kids decide to eat their single treat right away, forfeiting future rewards. Other children will wait several minutes, content to hold off to get a second treat.
A child deciding whether to eat a treat now or eat two treats later might seem like an overly simplistic example, but the choice of a “little benefit now versus a lot of benefit later” is a reoccurring, internal debate adults engage in daily. Do we buy a new outfit today on credit or save up and get it later, saving ourselves the credit card interest? Do we go out dancing tonight or save up money for college classes? Buy a used car today or put money into our retirement fund for later? We, as adults, tend to separate the us which exists now from the us which will exist later almost treating the two versions of ourselves as separate people. And a lot of us are not considerate of our future selves.
People who can push aside the veil of time and regard both their current self and their future self as the same person are more likely to make positive choices for their future self – budgeting, investing, and making better long-term choices. Treating your “future self” with the same consideration and importance as your “current self” can go a long way toward making better plans and improving impulse control.
Keith Chen has an interesting TED talk about how language and the way we think can affect the way we spend money. He points out people who think in terms of dividing the past/present/future into separate entities struggle to save money compared with people who think of the money they have as being part of one unified situation or time.
Also on the subject of impulse control, a significant part of sticking to a budget is trying to ignore impulses to buy items. Sometimes it is a big item like a new car or jewelry. However, since little items add up over time, we should also be aware (and control) the urge to buy little things. Almost every store and market in North America lines the areas around the exits with “impulse buy” items. Little things like chips, drinks, batteries, stuffed animals, and magazines. They’re small, often unnecessary items we don’t need. But they are so cheap, what’s the harm? The harm is the cost adds up over time. Just a few impulse items a week can add up to several hundred dollars a year. It’s not hard to spend a month’s worth of rent in a year of picking up impulse items from the check-out line.
It’s important to be aware of these urges and temper them, sticking to a planned shopping list, sticking to a set budget, and not buying items not listed in the budget. Fighting down the urge to pick up small, cheap items each time we visit a store can go a long way to staying under budget and saving money for when we need it later. Which, in turn, helps our future self.
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