Delayed Gratification Will Save You Money

Posted by The Happy Rock on June 12, 2007

Remember the ‘Marshmallow Test‘? It was a study from the 1960’s which found that preschoolers who were able to delay gratification at four years old were more likely to be socially competent, assertive, trustworthy, dependable, able to cope, and likely to embrace challenge. The ability to control our impulses will encourage success in most areas of our lives. Our relationships, careers, money, and wealth will all be positively affected by being able to delay our gratification.

As an example let’s look at two similar families who want to own their $300,000 dream home. They both have a $60,000 down payment ready, and the ability to handle $1,438 a month. Family 1 decides to purchase their dream home right away. They take out a 30 year mortgage at 6.0% interest. With a $60,000 down payment and minimum payments of $1,438, they completely own their house in 2037.

Family 2 decides to ease into homeownership and purchase a starter home for $150,000. They take out a 30 year mortgage with a down payment of $60,000. They make minimum payments of $539 and put another $900 towards principal. The first house is paid off in a little over 6 years. Assuming a conservative annual rate of return of 3% on real estate and subtracting selling fees, they have a down payment of $173,413. Finally, they take out a mortgage (20 years @ 5.7%) on their now $358,000 dream home. Their dream home is paid of in 16 years. Family 2 owns their dream home in 2029, eight years earlier. If they save the $1,438 in a high yield account to finish out thirty years they will not only own their home, but also have about $144,000 cash in the bank. The numbers get even more exaggerated if they keep saving and you run the numbers out 20 more years. Family 1 will have $540,000+ in the bank, while Family 2 has $1,000,000. Delayed gratification and compounding with time are quite helpful.

I kept the example simple, but it shows how much delayed gratification can influence positive results in our lives and our money.

» Filed Under Favorites, Materialism, Personal Finance, Psychology of Debt

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Comments

9 Responses to “Delayed Gratification Will Save You Money”

Pete @biblemoneymatters (38 comments.) on April 12th, 2008 1:17 pm

very interesting - kinda makes me wish we had done the same thing with buying more of a starter home.
"Solution Drew" (6 comments.) on July 23rd, 2008 10:06 pm

Lovely post, you really highlighted a great point about patience and the value of tempered investment.

I also believe that on any purchase you should take a week to think about it. Even better…..A month!

Of course buying a home impulsively would seem ludicrous, but you’d be surprised how often it happens.
Glory (17 comments.) on September 9th, 2008 4:37 am

Unfortunately passion is not my cup of tea. However I totaly agree with your idea
Mark (2 comments.) on December 13th, 2008 3:46 am

So true. Too many impulse purchases are made seeking instant gratification. If we follow the example of Family 2 we will be more fiscally responsible.
Mark on June 17th, 2009 9:31 pm

3% annual appreciation on a house? And this was written in 2007? What world was the author living in?

And where are the high yield accounts? Online banks currently brag about their 1.5% interest rate on savings accounts. Big whoop.