How to avoid the instant gratification trap

For most of us, investing tends to be an enticing idea, or perhaps an ideal, that we have a ‘one day’-mentality about. It’s also an exercise that we know is intuitively smart, but come month-end and our bank accounts look optimistic, our intuition often gets strong-armed by our immediate need to spend our money on things that may not benefit us in the long run.

This is the instant gratification trap – where we act on a whim, seeking immediate fulfilment by buying things which hold temporary value or have little value to begin with. To become a successful investor, start by cutting down on impulse purchases that leave you feeling fulfilled and rewarded for a mere minute. Investing is all about delayed gratification. Resist the urge to seek an immediate reward and work towards that long-term goal, which has a much larger payoff to look forward to.

Despite this rationality in human nature, we often don’t pay much attention to the logic of an advantageous choice and rather carelessly make choices which are seemingly more enticing but may have a hazardous impact in the long-run. 

– Javeria Ibrahim, writer and digital enthusiast

(Read full article here.)

As a financial planner and experienced investor, who has worked with thousands of clients, I can attest that it’s never easy to shake off the ‘one day’-mentality and reprogramme your money mindset, but it can be done and the result is well worth the effort (learn what your self-limiting money beliefs are and how to get rid of them here). To get started, here are a few lessons that I’ve learned and shared with my clients about investing:

Investing tips to get you started

1. Start yesterday

It’s never too early to start! You may have secured your first job or are at the brink of establishing your career. You’re focused on the present with the idea that there’s still plenty of time to invest. But, investing takes time. The earlier you start, the sooner your investment will grow. Here, think compound interest – the process of earning interest on interest over time. This is the result of reinvesting interest.

Albert Einstein didn’t say that compound interest is the greatest force known to man for nothing. The result of compounding is phenomenal, but it takes time. Instant gratification strips you of the benefits of compound investing long before you’ve seen your money tree grow. According to business tycoon and expert investor Warren Buffet, “Time is your friend, impulse is your enemy. Take advantage of compound interest and don’t be captivated by the siren song of the market”.

Compound investing is an exercise in delayed gratification with amazing long-term pay-offs. How to avoid the instant gratification trap.

2. Have a strategy that is unique to you and stick to it

Research has shown that up to 90% of success comes from having a strategy and sticking to it. Your investment strategy should be as unique as you are. A solid starting point is to take stock of your financial situation. For example, do you have debt? What are your monthly expenses? How much can you afford to set aside? Then, map out your financial goals. For example, are you saving for retirement? Do you want to purchase a house or car? Different people have different personal and professional goals that require entirely unique budgets, savings and asset classes. This is where a financial planner can put you on the right course from the get-go.

Once you have cemented your investment strategy, it’s crucial to stick to it. It will be tempting to change your strategy, but consistency is the key to keeping your investments on track. Matt Becker explains that you need to “tune out the noise” and remain focused on what you initially set out to do with your investments. Avoid letting “the news of the day change your mind” (‘The five most important factors for investment success’, Aug. 19, 2019, The Simple Dollar).

3. Choose the best horse for your course

Now that you have your investment strategy in place, it’s time to choose the investment type, risk and vehicle that aligns best with your strategy. When it comes to investments, each investment vehicle and asset class fulfils a specific objective in your portfolio. It’s important to understand the difference between an investment vehicle and an asset class: retirement annuities, tax free savings accounts and a unit trust are investment vehicles, while cash, bonds, equities and property are asset classes.

A bank or money market investment, for example, is perfect to house your emergency fund or to save for a short-term goal, such as your upcoming holiday or a deposit on your new car. Saving for your retirement in a bank investment would however not be beneficial as you would scarcely beat inflation over time. Invest long-term savings objectives in higher growing assets, such as equities, bonds and property, and house it in a retirement fund for tax efficiency.

“Never depend on a single income, make an investment to create a second source.”

– Warren Buffet

Remember that lifestyle assets, such as a house and car, etc., don’t produce an income, while investment assets should provide an income. Otherwise, it’s not an investment. An acid test can determine the state of your financial health by calculating, simply put, what you own versus what you owe. Your financial adviser can assist you with this so that you have a clear and realistic picture of your financial health.

4. Be wary of scams!

The two things that everyone wants to achieve overnight are to lose weight and to get rich, both of which are impossible short-term goals. There are no short-cuts. As Thomas Edison put it, “Opportunity is missed by most people because it is dressed in overalls and looks like work”. It takes self-discipline, dedication and effort to create wealth. As such, if it sounds too good to be true, it probably is. ‘Get-rich-quick’ schemes are inevitably popular, but ultimately unrealistic. They feed into the instant gratification mindset effortlessly, which makes them very tempting to try out. Steer clear of controversial schemes, like World Ventures and MMM. Instead of buying into a financial crash diet, which is high-risk and dangerous, adopt a steady and secure investment lifestyle that caters to your unique situation making it easier to maintain in the long run.

A steady and secure investment lifestyle will result in long-term success. How to avoid the instant gratification trap.

5. Don’t let your emotions get the better of you

We have experienced a tumultuous time, where the aftermath of the COVID-19 pandemic has instilled a fear of unpredictability and a general mistrust in the stability of our surroundings. These emotions should be kept at bay when making investing decisions. This is not the time to make rash calls, like cashing out early or avoiding investing altogether. You may be in fight-or-flight response where decisions will likely be based on emotions, one of which is fear. Instant gratification now means that you feel tempted to keep your assets under your hypothetical pillow simply to simulate a feeling of security.

In fight-or-flight response, our brains are incapable of making sound, calculated decisions, which will result in making financial decisions that you will regret later. Though the pandemic has led to it being the worst investment market since the 1930s, experts still advise against jumping ship now. According to David Bahnsen, chief investment officer at The Bahnsen Group, “It’s an incredibly bad time for people who don’t have to sell to be selling, because they are selling into an avalanche” (read full article here). History shows that panicking never helps. Remain steadfast and you will see your investments grow.

6. Investing in yourself is the best investment you can make

“Invest in yourself. Your career is the engine of your wealth.”

– Paul Clitheroe, financial advisor, author and presenter

Your human capital is your greatest asset. Recent events have opened our eyes to the fragility of our perceived safety nets – our monthly income. Most of us, regardless of age, ethnicity or gender, know someone who has lost their job due to these unprecedented times. The reality is most of us have little in terms of savings and investments. What we have is our human capital – our ability to work and provide for ourselves and our families. If your human capital is in jeopardy, your safety net is gone.

Until you accumulate financial or income-producing assets, you rely on your human capital to pay your expenses. The lion’s share of most people’s income funds their lifestyle. Make it top priority to invest in yourself first in order to invest financially when the time is right.

Investing in yourself is the best investment you can make. How to avoid the instant gratification trap.

7. Don’t follow the crowd

If your friends jumped off a cliff, would you do it too? It’s easy to answer ‘no’. The reality is that we’ve all fallen victim to the latest craze at some point. Herd mentality signals huge pitfalls for the would-be investor. Research shows that majority of people are instinctively programmed to follow the herd. This seeps into investing all too often, but these investments are usually not motivated by a rational decision and, as such, are extremely high risk.

To do what everyone else is doing, simply because everyone else is doing it, is not a solid investment strategy. Rather, listen to advice from a carefully selected, trusted few. Here it is helpful to seek out a good financial planner or broker who has a deep understanding of and good experience with investing. Remember, it’s your money and your risk. You will be the one bearing the financial consequences in every instance, not your next-door neighbor or work buddy who knows all about investing.

The ultimate tip: exercise delayed gratification

“The philosophy of the rich and the poor is this: the rich invest their money and spend what is left. The poor spend their money and invest what is left.”

– Robert Kiyosaki

Beware of the instant gratification trap! Investing is an exercise in delayed gratification. It is here where your long-term wants trump your immediate need to splurge money on things with temporary value. Train your mind to revert from finding fulfilment in instant gratification. Then you will see your smart investments grow. Your investments will provide you with long-term financial security and access to wealth far beyond your expectations.

Published on TakeChargeOfYourMoney.

“I blog about common sense personal finance for everyday folk who want to take charge of their money and start fixing the mess they’re in.” – Brendan Dale (creator of TakeChargeOfYourMoney)

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