How a Lack of Patience Can Kill Your Financial Future
Delaying gratification today for greater financial gains in the future.
“Impatience can cause wise people to do foolish things. ”
― Janette Oke
Personal finance writers constantly tell people to make “long-term financial decisions.”
The best example of making a decision with your money that will benefit you in the long is saving for retirement—something that you may not experience for several decades. There are all sorts of reasons people don’t save enough for retirement, but one of those reasons that are within your control is a lack of financial patience.
In this entry in the Money On My Mind series, I discuss what it means to be impatient with money, the impacts of that impatience, and how to adopt a long-term money mindset.
Defining financial impatience
The first step to making better financial decisions is to diagnose the problem; what exactly causes people to make poor decisions with money? A 2020 paper examined two competing theories;
A lack of understanding of how financial products work, aka“financial literacy.”
Impatience.
They ran two experiments, one testing financial literacy and one testing a person’s level of patience with money.
To test patience, they gave participants in the study an $8 gift card when they turned in their survey on financial literacy. The researchers offered participants a higher amount if they agreed to mail their survey using a pre-stamped envelope later.
The central question is; do you want $8 right now or more money later?
People face this exact dilemma when choosing how much to save for retirement. If I may put my dorky economist hat on, saving for retirement is simply an act of foregoing consumption today to fund consumption in the future. If you decide not to buy a $200 pair of sneakers today and invest that money, you’ll have more than $200 in retirement.
We can define financial patience as follows:
“Delaying gratification today for greater financial gains in the future.”
It should be no surprise to learn that the researchers found a strong link between financial patience and retirement savings. Participants who mailed the survey for more money on a future date reported much higher retirement savings than those who took the $8 right away. They also found that greater levels of financial literacy led to more retirement savings, but the impact of patience was more powerful than financial knowledge.
This is another piece of evidence that supports what I have been saying in the Money On My Mind series, which is that financial behavior > financial literacy.
Yes, it’s important to know what an ETF is and how to read your mortgage statement, but even more important is your ability to consistently make sound decisions, like choosing to save your future even if it means spending less than you would like to today.
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Why are we so impatient with money?
There are two theories as to why people seek instant gratification with money.
Nature: Studies have shown the portion of the brain that processes short-term decisions relies partly on emotions which respond to immediate rewards.
Nurture: People with low-income or past financial trauma are more likely to take less money now than wait for more money in the future.
Thoughts on increasing financial patience
One way to increase financial patience is to use the “future self” technique.
When you spend $200 on a new pair of sneakers—or whatever you splurge on— rather than saving that $200 for retirement, you are simultaneously treating your current self and robbing your future self.
That’s not to say you should not enjoy your life today, but it’s important to remember that trade-off; a dollar spent today is a dollar that is not invested and turned into income in the future.
The goal is to be kind to yourself right now without neglecting your future self.
Research has shown that if you create a vivid picture of what your future self will look like, you’ll be more likely to invest on behalf of your future self. If your future self shares similarities to your present self, and you view this future version of yourself in a positive light, your self-empathy and retirement savings will increase.
The future self exercise appeals to the biological reason we are impatient with money.
But what about people who are forced to settle for less today because their financial situation does not grant them the luxury of waiting for more money in the future?
Like with many financial problems, the solution here is increasing your income.
The higher your income, the more capacity you have to think in the long-term with money. Research has shown that past financial trauma can lead to short-term financial decisions.
So, it’s not as simple as getting a raise at work. It can take a prolonged period of living with a higher income before the effects of past financial trauma wear off, and you can make more strategic choices with your money that will benefit you in the long run.
Can you think of times when a lack of patience led you to a poor financial decision?
If you have not joined Substack Notes yet, I encourage you to do so here.
It’s like Twitter but not awful—and I am extremely active on Notes. One way I plan to use notes is to ask my readers questions as I am researching an article.
As I was researching this article, I put this question to my readers:
Here are two great responses I received.
Leon said:
“FOMO - jumping into a trade because other people are doing it. You end up buying at a high.
Selling stocks for a loss because you are panicking among all the doomsday prophets always predicting market crashes.”
I am glad Leon brought this up because one of the classic ways the Action bias, aka impatience, can hurt your finances is through overtrading your investments. The more impatient you are, the more often you will trade, and the more often you trade, the worse your returns will likely be.
Being able to buy and hold a boring portfolio of index funds for 30+ years is the ultimate embodiment of patience.
Liz said:
For me, it’s impatience to see results (in my business or life), so I invest in coaching or programs that don’t really teach me anything other than to keep doing what I’m already doing. Or perhaps to tweak a few things, but that’s it.
I can relate to this.
When you start your own business, you feel pressure to see results right away. Many gurus on the online course space sell you on a “shortcut” to business success. Be extremely skeptical of anyone who sells you on a shortcut to anything.
What are some examples you can think of when a lack of patience led you to a poor financial decision? Let me know in the comments, and join the conversation on Notes!
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
Honestly, I have absolutely no understanding of investments or trading.. literally zero. I was also never taught and it was never explained. Went through my entire life paycheck to paycheck, without the ability to invest. Into my 40's now, I have seen people win big and lose big within that realm. It is my complete misconception of what it is, but it seems like gambling to me, but then again, I really have no idea.