In just about every area of life, we are constantly faced with a choice: give in to the impulse to enjoy something we want right now or exercise restraint and wait for something even better in the future. We live in an instant-gratification society, and technology has made us even more likely to expect instant results.
Yet we can reap valuable rewards when we delay that gratification, and saving money for the future is one of the most powerful examples of this fact. Seeking a better life today at the expense of tomorrow prevents people from experiencing a higher quality of life in retirement, which can last for several decades. People’s lives and livelihoods are at stake when they fail to control their impulses.
Those who spend their money now to enjoy bigger homes, newer cars and fancier lifestyles are robbing their own futures. Imagine how much more money they would have for retirement if they lived more modest lifestyles and set some money aside for the future and let it grow over time.
People who spend all their money now risk ending up with Social Security as their main, or only, source of income. You know this already, but it’s worth repeating: Social Security is a poverty wage.
Why our brains default to instant gratification
Our brains are wired to take care of our current needs — a human trait that kept our ancestors alive in the midst of constant threats to their survival. We no longer face the types of threats our ancestors faced. So we need to override those impulses to live just for the moment.
When it comes to money, one way to do that is to become emotionally invested in your savings goal. According to a study by financial psychologist Dr. Brad Klontz, the rate at which people saved money increased by up to 73 percent when they used strategies to help them become emotionally invested in their future goals. For example, looking at images of what you want in the future and reminding yourself why you are saving helps strengthen your emotional connection to your savings goal, and that helps you achieve the goal.
“Overriding our natural impulses is needed to meet the financial demands of modern society, which require us to delay gratification, save money and build wealth.” —Dr. Brad Klontz, financial psychologist
Five ways to overcome the need for instant gratification
If you tend to give in to instant gratification, here are some strategies that can help you gain control over your impulses and save for the future.
1. Automate your savings
When we have to make the decision to transfer money into savings, we are likely to put it off — because of our human nature and the way our brains are wired. In fact, this is why Social Security is structured as a sort of “forced savings” program for Americans. One Social Security Administration official wrote in 1980, “This perspective is based on the belief that people are often short-sighted or myopic in their retirement planning.”
This is also the idea behind 401(k) retirement accounts through employers. Once you opt in to contributing a certain amount of your income to your retirement account, that contribution is made before you receive your pay. That eliminates the need for you to actively decide to move money into retirement savings every time you get paid, and it increases the chances you’ll actually save.
When you are free from constantly having to choose to save money, it frees up some of your mental space for other decisions, according to a senior behavioral researcher at Duke University’s Common Cents Lab, a behavior science lab that focuses on the financial well-being of low-income people.
Today’s technology makes it easier than ever to automate your savings. For example, if you are paid through direct deposit, you can arrange to have a percentage from your paycheck transferred automatically to a linked savings account every time you get paid. Plus, there are many apps out there that make it easy for you to automate your savings as well.
2. Know your numbers
Do you know how much money you made last month and how much you spent? Do you know where your money goes? Many people don’t. Awareness is a huge factor in realizing when you’re spending too much. Making simple adjustments, and keeping track of your spending regularly, can go a long way toward helping you spend less and save more.
This is why budgets are so helpful. Many people think of a budget as the enemy, but it’s actually your friend.
For a budget to work effectively, you need to set goals first. This is an important role your wealth manager plays in guiding you to financial well-being. He or she will help you identify what you want out of life, both now and in the future. And then, working with your current income, your advisor will help you develop a budget that will keep you on track toward achieving your goals.
Yes, you might have to cut out a few expenses. It’s a matter of prioritizing what’s most important. We all have those “must-have” expenses that keep us going, and that’s fine. But if you are spending more than you’re making, or close to it, you’ll need to set some guidelines for spending and then save a certain amount of money each month to keep you on track for achieving your retirement goals.
3. Start small, and increase your savings over time
Like other goals in life, you are more likely to save money if you start small. If you are already struggling to make ends meet, vowing to save $500 each month is only going to cause you more stress. Start small. Start contributing 1 percent of your income to your 401(k) plan, for example, or set up an automatic transfer of 1 percent of each paycheck into a savings account. And then increase that amount to 2 percent, and then 5 percent, and then 10 percent as your income grows. Aim to reach 10 percent as soon as possible.
Also, when you receive unexpected money in the form of a bonus, inheritance or gift, save a percentage of it.
The younger you are when you begin saving, the more you can benefit from the powerful concept of compound interest. Time is your ally when saving for the future.
Here is an example that shows just how big a difference saving money over a long period of time can benefit you. Saver 1 put money aside in an interest-bearing account from the ages of 20 through 45 and then stopped. Saver 2 didn’t start saving money in a similar account until age 45 and continued saving until age 65. But because of the powerful effect of compound interest, Saver 1 ended up with a retirement account worth $2,039,104, while Saver 2’s was worth only $895,444. Saver 1 invested only $91,000, but because of compound interest, that investment grew 2,041 percent, while Saver 2’s investment of $336,000 grew only 67 percent.
4. Fill your online shopping cart, but don’t check out
We all need things, and online shopping makes it convenient to find what we need and order it without ever leaving home. But you know it is — you’re looking at the thing you need, and the next thing you know, you’re looking at all kinds of things you don’t really need.
And for some people, online shopping is a fun distraction from the drudgery of everyday responsibilities and a diversion that can make them feel better on a bad day.
Go ahead and fill your shopping cart. Imagine that you are indulging yourself and ordering all those great things you want but don’t really need. But don’t purchase them. Abandon your cart without buying. That way, you get to experience the fun of shopping without spending any money.
By the way, if you add something to your online shopping cart and abandon it, some companies will send you an email or text offering you a discount on that item as a way of encouraging you to complete the purchase. So using this strategy can help you save on the things you do need.
5. Pay yourself first
In my experience, most people approach financial management backwards. They pay all their bills, and then they decide how to allocate the amount that’s left over to fulfill their most important needs. Pay yourself first. This is the cardinal rule of financial management.
“Do not save what is left after spending, but spend what is left after saving.” —Warren Buffett
Some planners refer to this strategy as “reverse budgeting.” Paying yourself first ensures that saving money is your top priority. Your savings turn into a monthly expense — paid to you, by you. Once you view this payment to yourself with the same sense of responsibility that you view your other bills, you will benefit from the discipline of having developed a positive new habit.
High-interest credit card debt can make it difficult to use this strategy effectively. Work with your wealth manager to balance the equally important priorities of paying off your debt and saving for the future.
I encourage you to start prioritizing your future now, before it’s too late. The choices you make today — your ability to say no to things you want today — will define how well you live in retirement. Please don’t become one of the millions of Americans who try to live on Social Security alone or work in retirement because they have no money saved for retirement.
Once you begin to see your money growing, you will begin to envision new possibilities for your future and gain confidence. In the process, you will learn to forgo instant gratification and recognize the benefits of delayed gratification.