Why Marshmallows Hold the Secret to Financial Planning

Personal Finance

Believe it or not, marshmallows do relate to financial planning, and they just might be the most important ingredient to your success!

Here’s how…

Walter Mischel, a psychologist at Stanford University, first conducted what is now commonly referred to as the Marshmallow Experiment in the late 1960s. It took a simple look at the development of a child’s ability to delay instant gratification.

The study was fairly a simple exercise, but the findings are integral to financial planning success, especially for those Millennials and Gen Xers just starting out in their careers.

Researchers placed one or two kids at a small table and placed a marshmallow in front of them. They were then told that they could eat the marshmallow now while the instructor stepped out, or wait a few minutes and upon their return receive a second marshmallow as a reward for their patience.

The recipe for success seems simple enough: “Don’t eat the marshmallow now, and I will double my number of marshmallows in a matter of minutes!” The recipe, while theoretically easy, proved to be a herculean task for most four to six year olds (and provides pure comedic value for viewers, see video below)!

The study did not end there. Years later, researchers conducted a variety of follow-up tests looking at average ACT scores, educational attainment, body mass index (BMI), and other measures of success. The results showed that the children willing to defer instant gratification were more likely to be healthier, have higher test scores, and outpace those marshmallow gobblers in many other categories.

The findings of the infamous research study hold particular weight when it comes to financial planning. Quality financial planning involves striking a delicate balance between planning for the future, while living in the moment.

Do I spend $500 now to buy that fancy TV for the upcoming NFL season, or stash away that same $500 towards my graduate degree, kid’s college, future retirement, (insert fun goal here)!

Unfortunately, most Americans spend the vast majority of their marshmallows with little consideration to the future consequences. In fact, Americans spend roughly 96 marshmallows for every 100 they receive, while saving a measly four (i.e., the average U.S. savings rate is 4 percent).

Four percent is far from a recipe for success given the changing retirement landscape!

The takeaway: Even the best financial plan outlining all of the necessary steps to meet your various goals is worthless if unwilling to give up some instant gratification today. That is not to advise against living in the moment (life’s too short!), but rather next time your paycheck pops into your checking account, give some thought to how much of it you can comfortably put aside.

Hint, in a perfect world you’d put aside 20 percent to 25 percent, but for many that just isn’t realistic or at all possible. If that’s you, start at 5 percent and try to work up from there. If you get a raise, spend half and direct the other half towards increasing that stash of marshmallows that will help you reach financial independence tomorrow (aka retirement, a lower-paying job you enjoy, etc.).

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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