We all know about instant gratification. It’s that feeling that when we find something we like, we must have it, here and now. It started when we were children. We would go to the store and find something we liked, and when we asked for it our parents said no. But then we cried and kicked and screamed until (for some of us) they gave in and bought it for us.
Little did our parents know that they had just injected us with the poison that would ultimately cost us financial freedom and millions of dollars. Sound crazy? Allow me to explain.
Instant Gratification will cost you millions
It sounds crazy, right? How can wanting something now cost me millions of dollars? I don’t even make, nor may I ever make millions of dollars. Well it’s quite simple when you factor in debt/interest/and the time value of money. You probably know about the first two, so let me dive right into the third: The time value of money.
The time value of money basically states that investing small amounts today is more valuable than investing larger amounts tomorrow (or in the years to come). To illustrate, see image below:
So Saver B put in a total of $14,400 and by retirement had $2.2 million dollars, whereas Saver A invested $72,000 (starting 8 years later) and by retirement had $1.7 million. Both have enough to retire on, sure, but imagine the amount of work Saver A had to put in to get there, vs. Saver B.
Then look at the amount of savings you are accumulating annually. I don’t know about you, but I haven’t started saving even $1800 per year, like the savers above have. The biggest reason? I don’t have any money… Why don’t I have any money? Because I love buying things, and haven’t developed the discipline it takes to say no to instant gratification.
Why Instant Gratification Will Cost You Millions
In case you haven’t figured it out yet, our desire for instant gratification leads us to buy things right when we want them. This leads to costing us millions in two ways: first, buying things immediately when we want them often leads to impulsive shopping, and takes away from our ability to save money. Second, as we feed our urge for instant gratification we often over extend ourselves, meaning we take on debt to purchase the things we want. This leads to interest, which is using the time value of money in the exact opposite way that we want (someone else is making the big bucks off of us).
Think about this: the small amount of discipline that we would require to skip those impulsive purchases could lend to our saving that money, and when put into an investment or retirement fund, could really capitalize on some riches.
The Latte Factor
I’m sure many of you have heard of this, but I’m going to explain it quickly to help you understand. $1800 annually amounts to a little less than $5 daily, or about the cost of a latte. Without making any significant changes to our spending, but simply cutting the latte (or your daily indulgence) spending, we could be investing 5 dollars a day in a way that will add up to MILLIONS!
I don’t know about you, but after realizing what our latte really costs us, I don’t want to drink a million dollar latte ever again.
To learn more about making millions from pennies and dollars, check out The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich
{ 11 comments… read them below or add one }
Whoa that image is quite stunning
Nice image! Feel free to tell we where you are getting 12% APR =)
*me
too bad its impossible for me too put any money into savings. School has totally screwed me out of any chance of having savings in the near future.
Yay compound interest! Even though 12% may be an ambitious annualized ROI to expect, any money you're able to put aside at a young age will have all that much more time to grow over the years. I've made it a point to put a % of any income I make (very little, admittedly) into my Roth IRA. Every penny is a penny closer to my goals.
Wow. But 150$ a month sounds pretty much for a poor student (considering we don't have starbucks here in the Netherlands). But on the other side, a couple of beers less during the week and you have that money also!
Nice thinking. There are always ways to save a few bucks. It doesn't have to be $150 a month, but most of us could find a way to save at least $50, right?
True, 12% may be a bit high, but the S&P 500 has been doing 10 percent or more consistently for quite a while, hasn't it? Check this out…
http://finance.yahoo.com/q/bc?s=^GSPC&t=my&l=on…
It's never impossible. We all make purchases that we don't need. Maybe not $150, but even a $20 start is something to grow on.
No doubt that investing is definitely the way to go to prepare for retirement. I was supporting the advice to start investing early and noting that even if you don't get 12% as your ROI, you will almost certainly gain positive returns over time and compounding interest will work its magic. Especially now, with the market having taken a beating, us young-in's have the chance of a lifetime to get in and buy low.
In line with Ibrahim, $50/month is a pretty realistic goal. I set up my account with TRowePrice because they let me start my IRA with a scheduled monthly contribution of just $50. It seems like I just started yesterday, but I'll be cracking the $1,000 mark by Christmas!