Introduction
In previous discussions, I’ve emphasized the significance of time in investments. It’s undoubtedly the most crucial element of compound interest, a fundamental concept in personal finance.
The Temptation of Instant Gratification
Today, if you desire a material possession, you don’t even need to save; you can pay for it in installments. If it’s interest-free for months, even better, but many people are willing to indebted themselves without considering the cost. This mindset is prevalent, with many falling into debt despite future regrets.
High-Risk “Investments” and the Allure of Quick Wealth
Numerous “investments” promising high returns but with substantial risks are now commonplace. These resemble bets: if you win, you could double your investment in days, but if you lose, you lose everything. The idea of easy and quick money is very appealing, and some buy into it. However, building a solid fortune takes a lifetime.
The Marshmallow Test: A Lesson in Patience
Walter Mischel’s famous marshmallow test at Stanford University in the 1960s and 1970s illustrates this concept well.
- A four-year-old child is placed in a room with a marshmallow and a bell.
- The child has two options:
- Ring the bell to call the facilitator and eat the marshmallow, or
- Wait 15 minutes for the facilitator to return, earning two marshmallows.
- Children who could delay gratification demonstrated self-control, which correlated with fewer behavioral issues and lower impulsivity later in life.
These children’s long-term success showed that patience in early life leads to persistent benefits and adaptability in a rapidly changing world.
Patience vs. Immediate Gratification in Modern Society
Our society increasingly favors immediacy, with advertising promoting “enjoy life today” messages, disregarding tomorrow. This mindset leads people to use today’s earnings to pay for past purchases, living behind their income rather than ahead.
The Power of Patience: An Investment Example
Consider a 32-year-old with 100,000 pesos. Investing in a diversified portfolio with moderate risk over the long term, at an average real return of 5%, can yield significant wealth by age 65. Regular monthly contributions further amplify this growth.
- Starting with 100,000 pesos and adding 2,500 pesos monthly to a diversified, moderate-risk portfolio yielding 5% real return, by age 65, the individual would have over 3,000,000 pesos.
- Two-thirds of this amount represents pure investment returns, the “reward” for patience and delayed gratification.
The key is balancing present enjoyment with future planning, avoiding excessive debt and unnecessary sacrifices.
Key Questions and Answers
- Q: What is the significance of patience in personal finance? A: Patience allows for long-term investments, leading to compound interest and wealth accumulation over time.
- Q: How does the marshmallow test relate to building wealth? A: The test demonstrates the importance of delaying gratification, a skill linked to better financial decision-making and long-term success.
- Q: Why is immediate gratification detrimental to wealth-building? A: Prioritizing immediate satisfaction often leads to debt and hinders long-term financial planning.
