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Investing

Time, money and marshmallows: Why time makes saving extra sweet

May 7th, 2012 by

We tend to love money and loathe the passage of time, but one has more to do with the other than you might think...

 
 
 

Time. We are always grasping for more and lamenting how quickly it passes. Indeed, its steady march comes with plenty of anxiety - about losing our energy, our looks, even our marbles. But time is a much kinder mistress to money than it is to humanity. Hang on to your money for the long haul and you'll have something more than teenaged kids and crow's feet: cash. And that's one comfort that can make life pretty sweet.

The sweet rush of spending

There's a little behavioural experiment psychology researchers like to perform on children. It involves a single marshmallow - and the promise of a second for those who can bear to wait 15 long minutes to eat it. Most kids swallow that sugary treat immediately, but others were able to hold off. It wasn't easy for them; they sniffed, stroked and stared at the treat, but they held their ground for the better payout. (And boy did they suffer. You can watch the agony of marshmallow anticipation here.)

Cute, right? Fast forward 40 years and researchers found a big difference between the kids who inhaled their marshmallows without a second thought and those who stuck it out for a better deal. Those who were able to wait were way more successful at achieving their goals.

Many adults would fail this test - perhaps not with a marshmallow, but certainly with money. In fact, many of us succumb to the exact same desire for instant gratification on a daily basis - when we pull out our credit cards for a "treat" we can't afford, when we mortgage a huge house with almost no down payment, or when we throw caution to the wind and spend every penny we earn. In these cases, there is no future; there's only today, right now, and the sweet rush of getting what we want, when we want it.

Time and money

But what does money really have to do with marshmallows? If you save your money, it isn't like someone's going to walk in and give you more for being "good," right?

Actually, that's exactly what happens. Only in this case, the deal's even better because the payoff gets bigger the longer you wait. The reason is compound interest and the more time you have, the better it works.

So let's consider saving for retirement, a chore about half of us put off every year. Suppose that your disciplined twin sister starts saving for retirement at 21, and makes a habit of putting $3,000 into her retirement account every year. You, on the other hand, decide to wait until you're established in your career and earning a solid salary. As a result, you don't start saving until you're 28. For comparison's sake, let's say you both earn 8 percent interest every year.

 

Age

Your Sister

You

21

$3,000

 

22

$6,240

 

23

$9,739

 

24

$13,518

 

25

$17,600

 

26

$22,008

 

27

$26,768

 

28

$31,910

$3,000

29

$37,463

$6,240

30

$43,460

$9,739

40

$137,286

$64,486

50

$339,850

$182,680

60

$777,170

$437,852

65

$1,156,517

$657,948

 

Okay, clearly your sister outshone you on this one. But she put in more money, right? True. But here's the kicker: at 65, your sister will have $498,569 more in the bank than you do, even though she only contributed $21,000 more than you did. That's the difference between retiring in style and retiring on a shoestring.

And it all comes in the form of the interest that accumulates over time. (You'd better hope that sister of yours is generous!)

Money and marshmallows

No one likes to think about getting old, and for those who are a long way from retirement, it can be hard to even imagine gray hair, not to mention a weekday that won't involve work. But saving doesn't have to be hard work. In fact, if there's anything you can learn from the kids in the experiment, it's that waiting is just plain hard, whether you're four years old or 40. And while the decisions you have to make about your money every day are undoubtedly a lot more complicated than a kid's sweet tooth, the principal is the same; what you consume now has a future cost, and in many cases, it's one you really can't afford.

Self-denial can be sweet...

Life is full of temptation, and we would never advocate cutting out every indulgence in favour of the future. The key is to balance out the sweet things in life with a little self-control. If a four-year-old can suffer through 15 minutes of bitter self-denial in pursuit of something sweeter, chances are you can do it too. And when you invest the money you save, the payoff isn't just a marshmallow, but money that you didn't have to lift a finger to earn. Seriously, is there anything sweeter than that?

 

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