My dad is good at relaying some of the harder truths of life. He gradually shared these things as we kids were old enough to face them. When I was a junior/senior of high school, he hit me with this one: you can’t have it all. That’s not the message that an idealistic high schooler wants to hear when he’s on the precipice of adult life. I wanted to hear that the world is beckoning and I can have it all! But eventually I realized he was right. Many choices in life are mutually exclusive and choosing one path of living closes the door on others. Choosing which college to attend is one of these major choices. When I started to get acceptances and financial offerings from colleges, I was confronted by the truth of this saying. There were two options for me- commute to the local state university on an academic scholarship or live away at my top choice but have over $100k worth of student loans. Even as a dumb teenager, I took the smart path. I couldn’t have it all- I could have the “college experience” I dreamed about or I could have strong finances right when I graduated. With this choice, even if I didn’t realize it, I was choosing delayed gratification. I was choosing flexibility in four years in exchange for a different, and at the time, less desirable college experience in the near term. The difference that this choice made in my life is immeasurable. It will go down as one of the top 5 best financial decisions of my entire life. Picking delayed gratification made it possible for me to go to grad school and start investing early. It worked in my favor with the college choice, but there’s a limit to the benefits of delayed gratification. Always living for the future is a great way to never live. Building a lifestyle that balances delayed gratification and spending to live now is necessary for a satisfying life.
Delayed Gratification Leads to Financial Stability
Using delayed gratification in financial decisions has major benefits. Practicing delayed gratification is a great way to figure out what things are important. Because money is finite and you can’t purchase it all. No matter how much you spend, there’s always more stuff ready to slurp up your paycheck. The best way- and possibly the only way- to overcome the rampant consumerism that assails us in our everyday life is to become comfortable with delayed gratification. It’s hard to say no to our impulse to buy something. Especially since there’s an entire industry trying to excite our impulses to buy junk we don’t need. In a store this can be hard, but even more difficult online, where anything can be purchased on Amazon with a single click (how convenient!). Learning to be intentional with purchases and limiting discretionary spending leads to financial freedom in the future.
Practicing delayed gratification adds up fast. Reducing discretionary spending by $100 every month and investing it instead compounds to over $100k after 30 years. The whole FIRE movement is built on the premise of intentionally spending less to achieve long term financial freedom. While smaller bits of discretionary spending can add up, bigger life expenses are even more influential. Take cars for example. They’re a necessary evil for a lot of us in the US. But instead of most people being reasonable with car purchases, plenty of people spend a stupid amount of money on cars. Many middle class people will make 60 months of payments on a new car, then trade it in for another new one once it’s paid off. They willingly lock themselves into a permanent car payment. And since the average monthly car payment on a new car is $700 (!), that’s a huge commitment. It’s much more than the $100 worth of unnecessary junk that we tried to save on up at the top of the paragraph. Practicing delayed gratification with cars means being comfortable with driving a used car that doesn’t bring much status. Don’t drive a complete clunker- the extra repairs aren’t worth it. But getting a reliable used car that will last for years is the way to go. Right now, the average monthly payment on a used car is still high ($525). But in my recent searches, you can get a decent used car in the $200-300/ month range. If you own the car outright after 5 years and drive it for 10 total, that’s saving between $13,500 and $19,500 over the course of 60 months. That’s enough to buy another decent used car with cash! For another 5 years, that money can go right into an investment account. An extra $250/month going into index funds compounds to $123,000 over the course of 20 years (assuming 7% annual return). Making the choice to get a decent used car instead of a new higher status car isn’t a sacrifice. Putting the difference in a car fund permanently frees you from the car payment hamster wheel and beefs up your retirement accounts.
But When Does it Go Too Far?
It’s easy to imagine a scenario where all financial decisions are made with reaching a FI number (the amount of money invested that you need to be financially independent) in mind. Vacations get put off because when compounded, that money could pay for 5 vacations after hitting your FI number. The same can be said about pursuing a hobby like fishing, where gear for a season can cost a couple hundred bucks. Or even the much maligned coffee shop coffee, which according to the internet is the number one destroyer of future wealth. Practicing delayed gratification for all things at all times is when it goes too far. In this scenario, delayed gratification is preventing a more satisfying present for the sake of an uncertain future. Another hard truth of life is that the future isn’t guaranteed. And what’s possible now- if travel is for you right now- might not be possible in the future, even if you’re financially independent. Good health and good circumstances aren’t guaranteed in the future. A freak injury or surprise diagnosis can make travel much more difficult. Besides, pursuing delayed gratification to the point where you do nothing that lights you up makes life dull. It doesn’t matter how high your savings rate is when the rest of your life isn’t compelling. This is where the “I’d rather have xyz and be paycheck to paycheck” crowd has a point- at least their lives aren’t boring! For a lot of people, the idea of doing nothing for 20 years so they can retire early and then do fun stuff is unappealing.
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The Wisdom Required to Find Balance
We all need to balance ourselves on the spending/saving spectrum. On one extreme is living paycheck to paycheck, carrying credit card debt, and paying for life in monthly installments. The other extreme is not spending a penny more than what’s required to survive and squirrelling the rest away for some future moment. Neither seems very fun. The ideal balance allows for long term investing and saving while living a fulfilling lifestyle. Unfortunately a lot of online advice tends towards extremes and eschews nuance. Let’s analyze what finding a balance looks like in the context of personal finance’s greatest enemy- coffee shop coffees. Buying coffees out every day does really add up. Ordering coffees every day as part of a larger lifestyle of convenience purchases and financing hamstrings any investing effort. But getting a nice iced coffee is a fun treat to have. I strike a balance here by brewing my own pot of Maxwell House all week (I’m not a coffee snob). Then I swing by Dunkin for an iced coffee after Mass on Sundays. I still get to regularly enjoy iced coffee and it remains a small line item in our monthly expenses. You may say “But Frugal Jon, that $7 per week could be invested in a low cost index fund and be worth $72k in 40 years assuming your usual 7% annual returns!” To that I say that I’m focused enough on investing that I won’t need that money in 40 years. Because I’ve already run the numbers and I can enjoy the weekly iced coffee knowing that my dedication to saving for the future is enough. I’m already making the right choices with bigger things, like the cars we drive, for example. Making the right choices with the larger line items (housing, transportation, and food) makes it possible to round out a lifestyle with weekly iced coffees and other things that bring joy to life.
Balancing saving and spending is a continuous process. Investing an extra $100 every month by reducing discretionary spending is a powerful example of how compound interest works in your favor over time. But don’t let that fact completely govern life. Figure out what’s important to you and cut the things that don’t really matter. You’d be surprised at the random waste in your budget that you won’t miss from your life when it’s gone. Take the $100/month from the spending that isn’t really worth it- like the difference between a new car and a decent used car. Or cut back on certain spending to make it more special. My Sunday iced coffee means a little more because I only get it once a week. If I got one every day, it would just become part of my everyday routine. That’s the last super power of delayed gratification- it makes the every day feel a little extra special. And saves a lot of money along the way.
