Delayed gratification is one of the main tenants of personal finance. Scan the front page of any major personal finance website, or read through the table of contents for any popular personal finance book, and you’ll see examples of delayed gratification.
We see this in tips and techniques like freezing your credit card so that you have to wait for it to thaw in order to make purchases on it, or by writing out a list of things that you want, waiting 30 days, and checking to see if you still want to make those purchases. Both of those are ways to trick yourself into delayed gratification.
The reason that it is a personal finance cornerstone is because one of the major problems that we see in our daily culture is impulse purchases and a “need-now” mentality. We see this in the great show “Arrested Development”, where two of the main Bluths are purchasing a home that slowly gets upgraded from a modest 2 bedroom home to a mansion with a gatehouse (or two) because, “at least then you’ll have it”.
In opposition to this, the longer that you can go without the big upgrades, the fancy car, or the expensive home, the richer you will be. The longer you have your money working for you and not someone else, the more interest you will earn, and it will compound over time to earn you even more money.
So when it comes to big purchases, we all know that the best thing to do is wait as long as possible. Make your old car last for as long as possible, and wait until the right time to upgrade your major appliances. But what most people don’t realize is that there are lots of little ways that you are paying now instead of paying later – but they may not be bad.
If you are employed, every paycheck that you receive has some taxes taken off of it. At the beginning of each employment, and at the beginning of each tax year, you’re allowed to choose if you’d like even more of your paycheck to go to the government. A lot of people chose this option, and for some, it is a good choice.
It means that every April you get a large paycheck back. You give up money now, to get money later. The major pro is that it is a forced savings account. If you’re bad at putting aside money, this could be a good way to set aside money that you won’t be able to touch until April of next year.
The downside, however, is that the government gets to hold your money for a full year before giving it back to you. In that meantime, you could instead be earning interest on that amount. So what’s better? That’s up to you and your finances.
If you spend a lot of money at Costco, then the Executive Membership at Costco is another example of Money Now or Money Later. In this case, you spend money up front to get the executive membership ($110). You then earn cash back on all your purchases over the next year, which you receive in the form of a cheque every year. If you’re doing the math, as long as you’re spending about $2000 a year, the Executive Membership is worth the expense now.
My wife and I, for example, don’t have kids but we do live close to a Costco, so this year we opted for the Executive Membership (sadly, after we had made some large purchases). It means that we paid more money now, but we plan to get enough money back so that it will pay for our Executive Membership for the next year, and so on.
Locally we have a chain of stores called “Co-op” that are primarily gas stations, but they also have a few grocery stores as well. They are a membership gas station – in that you can be a member, but don’t have to be in order to get gas there. Like Costco, there’s a paid membership portion to joining the club.
However, the major difference is that it is a one time payment for a lifetime membership. This means that we paid the membership cost once ($27) and from now on, we will get an annual cheque back based on how much we spend at the Co-op stores.
It usually works out to about 5 cents per litre, plus a percentage of in-store purchases. At 5 cents a litre, that means that our membership will pay itself off after about 540 litres, which would be about 15 fillups for us. That would take us about 6 or 8 months, and anything after that is pure profit.
As you can see, some Money Now or Money Later choices are pretty straightforward, and others require a bit of math to determine the best course of action. It also depends on your immediate financial situation, as well as your long term financial goals.
So which Money Now or Money Later choices have you made lately?