Posted by Tim Stobbs on May 3, 2013
So did you ever wonder if we could give a simple test to a young child to determine if they would be successful in life? Well there is a test that will strongly predict it…really?!? Yes it is the classic marshmallow test. The test is simple: put a young kid in a room with a marshmallow and tell them if you don’t eat it while the researcher is gone for twenty minutes they will receive a second one when they get back. If they can wait, which about 1/3 will be able, they will on average have better health, earn more and save more in life. Heck the test is such a strong correlation it even trumps what social economic status you were born into. See here to understand how it works.
This simple test is all about self control, which isn’t always about willpower, but rather also about how well can you distract yourself from temptation. Today and right now is always way more important than next week and obviously WAY, WAY more important than the next 10 years. So if you find saving for your retirement hard, it could be an issue with your self control.
So if you failed the marshmallow test as a kid are you doomed to not retire early? No, not exactly. While I would wager the vast majority of early retirees have excellent self control, the good news is if you practice it and plan around your temptations it is possible to still be a good saver. How? Well in no particular order:
- Pay in Cash for High Temptation Items – Everyone has their weaknesses in spending. For some it is food, others movies, books , shoes…take your pick. Now if you put yourself on a cash spending for your problem area you trigger an interesting psychological affect called the pain of paying. We work hard for a money so giving it up can hurt just a little bit. Cash is the hardest form of payment, unlike credit cards which often can be a little bit more surreal. Also it provides a handy way to check how much money you have left in a given month for your vice.
- Plan for a Lack of Control – So rather than wait to save with what is left over at the end of the month, make an automatic transfer to your savings on payday. Why? Because we tend to just deal with what we have in our main bank account, the less there is, the more likely you won’t over spend.
- Play Mind Games – When saving for something long term it is hard to keep focused, so plan for the lack of focus and plot out rewards along the way. They don’t have to be huge, just something to keep you head in the game. For example, if I save $12,000 in my retirement accounts in the next three months I will buy myself a new DVD that I really want. This is called reward substitution using something right now to keep you on the path for the long haul.
- Plan a Guilt Trip - There is nothing like guilt some days to keep you on the path. If your kids, your wife, your friends and half you work place know about a short or medium term goal, there is a lot of social pressure to keep to that goal. So tell the world your plan (or part of it) and keep yourself accountable.
- Never Shop When Your Exhausted – Your self control is like a muscle the more you use it during the day the more likely you will have it fail towards the end of a long work out (or day). So plan your high temptation situations early in the day if possible. For example, you could do you grocery shopping after breakfast when you are full and in a good mood.
So you might ask, well great, but how do these really work? Well guess what, I’ve used or am using everyone of those ideas in my own life. I’m not sure if I would have passed the marshmallow test as a kid, but regardless I’m still on track to do well in life because I learned some self control. You are not doomed in life due to your birth self control, it can be improved with practice and a few tricks.
How is your self control? Would you have passed the marshmallow test? For fun here are some adults doing the test.
Posted by Tim Stobbs on February 27, 2013
So after last week’s post regarding not having an interim goal until full financial independence I started thinking a bit more about financial independence (FI) and realized something important: it can be broken up in phases or layers.
The classic example of this is to consider each of your major bills and celebrate as you get enough savings to be financial independent for each bill. So if your power, water and natural gas bills are $2250 per year in total, when you have saved about $56,250 (I’m using the 4% safe withdrawal rate), then you FI for just those bills. Yes the separation is purely artificial, but it can be useful to create interim goals on your way to full financial independence. The term for this, in classic motivational theory, is a success spiral (yes, it is official I read too much ).
Also after you start stacking up those layers you end up with your FI cake. So in my case, I have the mortgage paid off which is the base of my FI cake. Then depending on how I stack those next layers I could break it down bill by bill, yet in some cases those layers are going to be so thin that a 3D printer would have problems laying them down. Case in point we only spend like $264/year for both cell phones, which would require about $6600 to fill that FI layer. Since I can save about $4000/month, that level of granularity is getting a bit ridiculous.
So now I have a Goldilocks problem, I don’t want too thin of a mattress (or layer) and the interim goal feels too easy, too thick of a layer and it feels too hard. Where’s the middle ground? Well to work that out I started a bit backwards, on our basic spending of $24,000 a year, how much of that can be covered by the profits from our small businesses? A rough number of that would be $10,000/year, so that leaves $14,000/year to fill in. So how much savings to I need to roughly generate that level of income…$350,000 (or $14,000/0.04). Given I’m already around $200,000 saved, that means I need to save another $150,000 which at my current savings rate is just over three years.
Thus in a puff of smoke and some magic words I have a new savings goal: get my investment net worth to $350,000 in three years or Jan 1, 2016. Is it artificial? Why yes it is. Is it contrived? Of course. Who care as long as it works for me!
So that folks is the point of your FI cake: motivation. Make your layers any size you want, add pink or purple icing for all I care. As long as it works for you…do it. The point is to turn a huge problem (saving for your retirement) into smaller more near term goals, which you can see the end to and do something about. Long term goals are a bitch to meet without smaller sub goals (think how many people you know say they want to write a novel, but never do it).
So what is your next FI layer? Or do you use interim goals?
Posted by Tim Stobbs on February 22, 2013
Why? Because I feel like I have failed you. I’ve been on auto writing of random thoughts for the last few months because I’ve haven’t had my heart into writing. So for every crappy post you have read on this blog I offer my regrets. If you are still reading this blog…you are better person than I am.
So what’s up? I’ve been blue. Not depressed, but rather a bit overly stressed at work and feeling sorry for myself. Nothing overly serious, but never the less it was real. It affects you in a bunch of subtle ways, but most of all I get seriously non-productive when I get this way (or if you prefer lazy).
Yet yesterday something wonderful happened…I got happy again. Not your basic laugh track happy, but rather spotlight brilliance happy and I’m sorry for blinding you with my silly grin all day. Nothing in particular turned the tide, but rather just the day to day of living life and things just got better. Perhaps it was getting more a few more minutes of sunlight today, or perhaps it was I stopped stressing about things I can’t change or perhaps it was the fact I remembered to feel hope that the world can get better. I don’t know, but I’m grateful it did happen.
I think what honestly happened was the let down after paying off the mortgage. What?!? You see I’ve been living and breathing that goal for the last three years so when it was finally done and I had no more interim goals until retirement which is like seven years away…I felt empty. I think over the holidays that excitement kept it tolerable, but in the cold dark of February with nothing to look forward to the let down hit.
You see the reality is once you pay off your mortgage…nothing changes. You still go to work, you still have the rest of your bills, and the rest of your life. Yes you have more numbers in your bank account at the end of the month, but that is it. Sorry if you had thought it would be more interesting that that, but in reality not much changes.
Granted there are some upsides to it, like I handle the unexpected expense effortlessly now. Or the fact, I could quit my job tomorrow and pay the bills with a minimum wage job. There is potential there for things, but I’m not using any of it right now…so things are well sort of boring. Hence the let down, since I was focusing a bit too much on the potential, rather than the actual change (which was nothing).
So where do we go from here? I don’t know, but something will change. What? I don’t know, but I welcome any ideas you have. What would you do if you paid off your mortgage? How would you change your life?