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Living a successful financial life is about making smart choices. But choosing smartly is not a simple proposition in a world that constantly tempts us with shiny objects! It doesn't help that the choices we make often have little to do with what we need and want and a lot to do with marshmallows.
Have you heard of the marshmallow test? A famous psychology study from the early 1970s, the marshmallow test (officially the 'Stanford marshmallow experiment'), looked at people's choices when deciding between instant rewards or delayed gratification. In the study, children were offered a choice between having one marshmallow immediately or, if they waited a short time, getting two marshmallows instead of one. The children were left alone in a room with a single marshmallow for about 15 minutes. If they chose to wait, they were given a second marshmallow when the researcher returned.
Not surprisingly, the study revealed much more than just which children were willing to put off immediate gratification for greater future rewards. In follow-up studies, the research showed that the children who waited longer for the second marshmallow also tended to have better outcomes later in life. Higher SAT scores. Higher levels of education. Greater career success. Even better physiques. And it all traced back to their ability to focus on longer-term rewards during the marshmallow test. Cheers to the power of delayed gratification!
Unfortunately, the world conspires for us to fail the marshmallow test. As a consumer in 2021, passing the marshmallow test is more challenging than ever. Instead of facing the choice between one or two marshmallows, you are inundated with a tidal wave of marketing and merchandising messages everywhere you look. Walk into Target, and you will find a dozen things you never knew you had to have! And then you'll place them in that giant cart. Check your mail, and a gorgeous photo of your dream car is right in your hand—along with an offer you can't refuse from the dealer. Good luck if you log on to the internet!
Here are my top 3 tips to help pass the marshmallow test—no matter what temptations the world throws your way:
- Acknowledge that 70% of your decision-making is emotional.
As much as we like to think our rational brains are in control of our actions, that's often far from the case. That's precisely why that pint of Haagen Dazs calls to us at 9 pm on a Saturday, and why commercials have us running out to buy everything from diamonds ("a diamond is forever" after all!) to a shiny new iPhone (even though the one in our pocket works just fine). Once you acknowledge that the impulse to buy is emotional and highly manipulated by marketers who are paid well to get you to buy whatever they're selling, you can make better, smarter choices that are right for you. - Resist impulse purchases.
One of the best rules of thumb I know is to wait 48 hours before making a major purchase. Buying a new car? Don't drive it off the lot the same day you walk in. Buying a house? Don't get caught up in the market frenzy and buy because you ‘should.’ (Read more on that hot topic in my blog post Stay out of the heat of the housing market!) When investing in stocks, don't let the news cycle or periodic ups and downs in the market sway your strategy (Robinhood, anyone?). Successful investors focus on the long term, relying on time and patience to build their fortunes. - Recognize that there's no such thing as 'free money.'
Tempted by 0% interest and 24 months to pay for a kitchen full of sparkling new appliances? Don't be. The marketing is compelling, but interest-free or not, you will end up with $25,000 more debt. My advice: pay cash when you have it, or pay yourself $1,000 per month over the next 24 months, and then negotiate the price of the appliances. Care Credit's value proposition for medical needs is excellent when you pay the full amount in time to avoid the deferred interest. But do NOT be tempted to use that 0% card to cover elective surgery or other non-emergencies; save up for that expensive eye lift, and get the work done when you have the cash in hand.
Marketing is not new, but it is more sophisticated than ever. The result: the marshmallow test has never been more challenging. The best way to pass the test and keep your finances on track is to acknowledge the temptation, be thoughtful about every choice, and make decisions based on your larger goals.
Of course, not every decision requires such careful scrutiny. Last week, I succumbed to some smart online merchandising from the retailer CB2. Because I ordered some things from their site when I remodeled, I now receive a constant stream of perfectly personalized emails. So, yes, I bought a lovely pink marble incense burner that will look gorgeous on my new coffee table. I don't even burn incense! They got me. Luckily, my $30 purchase won't break the bank, so the buyer's remorse is minimal. But it does have me on guard for that next irresistible offer from the BMW dealer. My two-year-old car is just perfect, thank you—especially when I'm nibbling on a few marshmallows while I drive.
Feeling tempted to make a big purchase that might not be in your best interest? Give me a call. I am always working in your best interest—especially when the marketers aren't!