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Women in Investing
If you have taken any general psychology class in college, then you may vaguely remember being told about a study from the 60’s and 70’s called The Marshmallow Experiment.
This study is heavily referenced and has recently been correlated with understanding people’s behavior with money. Before we dive into this, here is a very quick summary, for those of you who don’t remember:
Children were sat down and a marshmallow placed in front of them. They were instructed that if they were able to hold out for about 15 minutes, then they would get 2 marshmallows. Some couldn’t handle the great temptation and went ahead and ate the marshmallow.
Others successfully distracted themselves, fidgeted, sang, and did as they could to wait for the researcher to return and give them another marshmallow.
Subjects with delayed gratification (did not eat the first marshmallow) had numerous factors that made them stand out of the other subjects who went ahead and ate the marshmallow.
Not only did they have higher test scores, have better weight, and overall self-control, but they seemed to outrank their peers on a wide range of factors.
Delayed Gratification and Money
When I first began learning about investing, I tried to find all the behaviors and characteristics of the best investors, so I could develop those skills and eventually become successful myself!
I have read some articles that have described the investing behavior of older individuals who have built great retirement accounts but never made much money at their jobs. I have heard about adults who may work as a cook or janitor and yet accumulate millions. It’s amazing!
If you’re interested in learning more about the behavior of the wealthy, I highly recommend the book, The Millionaire Next Door.
This habit is called delayed gratification. You may also see this labelled as “Delayed Satisfaction”.
We’re all guilty of giving into our wants in the moment – being able to stray from temptation is huge when it comes to investing!
Now, delayed satisfaction is a skill found in very small children. In fact, some of the subjects in the original Marshmallow Experiment were as young as 6 months old! If you’re reading this and thinking to yourself that you may have been one of those children who would have eaten the first marshmallow, that’s actually okay!
We can learn how to build that skill! Since you’re reading this article, that already means you have taken a step towards wanting change.
You have already hit a point in your life where you’ve finally said, no. And that’s great! You’re ready to challenge yourself. You’re ready to build a better life!
How Delayed Gratification Relates to Investing
Delayed gratification is accepting what is small now, in order to have what is larger later on.
So, in the Marshmallow Experiment, some children chose to give into temptation because they wanted to satisfy themselves now without considering what that satisfaction would feel when given twice as many marshmallows.
Developing this skill can benefit you in two significant ways:
- It can help you save more, and thus be comfortable with investing more. You’ll be able to recognize the importance of investing into assets and be happy with your choices.
- You will make smarter decisions around investing your money.
Be sure to check out these related articles!
Delayed gratification is the foundation of investing.
If you can understand and appreciate your money, and stray from temptation (spending, hoarding, etc.), you will have less of an emotional attachment with putting your money into investment accounts!
The thing about investing your money is that you cannot touch it after putting it in. It’s like you’re sending your money away to school in hope that it will return successful and make you proud.
And, what if the stock market crashes and you want to sell or you feel the temptation to withdraw from your retirement accounts early?
You would get punished with very significant taxes and fees.
Delayed satisfaction is huge regarding making smart decisions. This can be lumped into the overall idea of not being able to make wise decisions when under temptation or having a spontaneous personality.
To be a successful investor in the long run means taking time to do your research and asking others for advice. Most importantly, it means not giving into deals that seem too good to be true or making sudden decisions when something goes wrong.
Imagine all of the people who withdrew their money from the stock market due to the 2008 recession. It scared many because they let emotion get to them. They saw doom and didn’t look to remember how stocks work.
In the simplest terms, the little line on the chart can only go back up if it’s gone down. Drops happen every day, and bigger drops happen a few times per year.
This skill can help you do so much more than just be okay with not seeing your money for a few decades.
It can help you to make wiser decisions, be more calm regarding your money, and help you be smarter overall with your money!
How to Practice Delayed Gratification
If you are more of a beginner with money, some great ways to practice delayed gratification include:
- Build an emergency fund and never use it for anything but emergencies!
- This is typically the first step that we are given when reading personal finance books or when asking others how to get out of debt. I always advocate for emergency funds!
- What’s great about emergency funds is that it forces you to practice investing!
- Investing your money is the voluntary putting away of money so you can have that money for later (and, if done right, have quite a bit more than originally invested!).
- Saving approximately 6 months of income in liquid assets
- I have seen a range when it comes to how many months should be set aside for if you or a spouse loses a job, or you don’t receive your active income anymore. Many say to start off with 3-6.
- To practice, make your goal for this even bigger! Seriously. I have read in some books to have up to 7 years of money set aside for if something catastrophic occurs in your family.
- Consider downsizing or minimalism
This is actually something that really helped me when I began budgeting and trying to pay off my student loans. I chose to live in less-luxurious housing, and began practicing a minimalist lifestyle (to an extent, at least), in order to save money. This really forced the behavior of delayed satisfaction into my core. I lived it everyday and it reminded myself of my goals. When I look back, I am so grateful for making this decision!
For those of you who are more experienced and need to build this skill, let’s look at the difference between needs and wants:
As introduced above, many can get freaked out over a stock market crash and withdraw their assets. Some investors may be easily tempted and can get themselves into deals that will cost them due to not doing their research. Others may rush into an investment without learning enough about it, and make a choice that will be far less superior than other options.
By determining your needs and wants, you can better practice self-control.
Examples of Needs:
- You may know that you need to have some “safe” investments in assets such as index funds.
- Another need may be to have enough passive income to support a few of your current bills in order to finish paying off your house.
- More importantly, you probably know how much money you need to feed, shelter, clothe, and educate your family.
Keeping your needs in forefront is key to practicing delayed gratification. Focus on your needs, and don’t let temptation drive you away from them.
Examples of Wants:
- You may want to build wealth to quit your job at the age of 40.
- You may want to own real estate assets but aren’t fully educated on it yet.
To gain some more experience, pick up a book on the habits of successful entrepreneurs/wealthy individuals. I love learning new habits to improve my lifestyle.
Some I’ve began:
- I brush my teeth with my non-dominant hand every morning to quickly wake myself up. It forces your brain to think and already gets you focusing early in your day.
- I do quick workouts in the morning, before eating, to increase blood flow and encourage a healthier lifestyle.
- I have been learning meditation to reach my goals faster and improve my overall satisfaction with my life.
There are all sorts of ways to begin practicing this skill! No matter your personal goal with money, it’s best to start learning how to properly delay gratification!
