Opinion & Analysis
Last week my partner Joan sent two large packets of jelly beans to a couple of special boys: Aston, 7, and his brother Jesse, 3.
By all accounts the jelly beans were well received by the boys (although the parents seemed a little less jubilant).
The interesting thing about these gifts was the way that the two boys treated their sweets quite differently: Jesse ate his with gusto and within 24 hours they were gone (this included a breakfast that consisted mostly of jelly beans).
Aston, on the other hand, decided that he wanted to make his last and so rationed himself to one jelly bean a day - he still has most of his left.
The episode brought to mind a famous series of studies at Stanford University from the 1960s with a group of 3- to 5-year-olds. Each child in the study was offered a marshmallow that could be eaten immediately or, two marshmallows if the child waited for 15 minutes. The follow-up showed that children who could defer gratification had better educational attainment, lower BMIs and were more successful later in life.
Deferring gratification obviously has a big role in successful finance: those who cannot resist the myriad of temptations that are put in front of us will not build wealth as well as someone who knows how to wait. The serial shopper may get a small reward now but the person who can wait gets a much bigger reward later.
I have long thought that those who are financially successful are not necessarily those with the greatest knowledge or skills. Instead, I think that attitude and habits are far more important: you can know everything that there is to know about finance but it will get you nowhere if you splurge every time you go to the shopping mall. Good habits, discipline and the ability to delay gratification make up the key to wealth.
The good news for Jesse and the rest of us who like to scoff the adult equivalent of eating jelly beans quickly is that good habits and discipline can be learned. These are not innate qualities but ones that we can develop by parenting and coaching ourselves.
So if we wanted to teach Jesse and ourselves good habits and discipline, how would we go about it? The first thing would be to change the environment. The wrong environment means that you have to make a big effort to do the right thing; conversely, the right environment means you need effort to do the wrong thing.
In Jesse's case this would mean putting the jelly beans somewhere out of sight. In the case of adults, it may be things like staying clear of the shopping mall and only grocery shopping once a week. It may also be things like restructuring your finances so that you join KiwiSaver or adopt a "pay yourself first" approach where you take money to be saved out of the account before you see it or have the ability to spend.
Second, Jesse may need to be distracted in the time-honoured ways that parents have done for eons. We may also need to distract ourselves: not simply so that we spend less but in a similar way, investors also need discipline. Fighting off the panic to sell in a bad market is not easy and means that we may need a break from the wall of negative noise that comes from such markets.
Third, don't let's get mean with the jelly beans -it is unrealistic to think that Jesse will save them all for his 10th birthday! Neither should we be too tough on ourselves: those who set a budget that is too strict are likely to blow it and never go back. We all need some reward, not the prospect of an unremittingly bleak and austere life.
I do not think that anyone needs to worry too much about Jesse - if he has the same determination in 29 years as he has now, he'll be just fine. As for adults, we can learn a lot from what works for children. In the final analysis there are only a few things that we have to get right for financial success: a good surplus and the intelligent use of that surplus to either repay debt or invest.
If we can get good habits around these few things, doing well with money is about as easy as a bag of jelly beans.
Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes. com. This article is of a general nature and is not personalised financial advice.
- Sunday Star Times