Financial planning is really about changing behaviour; in particular, deferring gratification.
Walter Mischel has run a series of experiments studying how pre-school age children, and others, defer gratification.
One famous experiment gave a marshmallow to a four year old. The child was left alone with the marshmallow for twenty minutes. The child could eat the marshmallow at any time. But if they did not eat the marshmallow they were rewarded with another marshmallow after twenty minutes.
It was a simple proposition: one now, or two later.
The results are fascinating. And amusing. And have been replicated many times, often on YouTube. You can watch one here: The Marshmallow Test (This is really funny. Watch it to the end!).
Most, i.e. more than 90%, of the kids eat the marshmallow. Perhaps not straight away: many a marshmallow is slowly licked, sucked and nibbled into a slobbering sugary mess before it is finally gobbled by the tortured toddler.
The original experiments started in the sixties, and the original subjects are now approaching retirement. So far the results have been near perfect predictors of future financial fortunes. The kids who deferred gratification matured into above average achievers in later life. This is not just financially, but right across the performance spectrum, including, not unexpectedly, lower body fat levels!
Perhaps 90% of humans under age five fail the marshmallow test explains why 80% of humans over 65 live on the age pension. If you would like to try your own modern equivalent, take this Guardian quiz.
The good news is Mischel’s subsequent experiments suggest deferred gratification is a learned response. Your clients can change. Properly informed and educated, your marshmallow-munching clients can change their financially self-destructing behaviour, and join the 10% of financial outperformers.
Tell your clients about the marshmallow experiment. Send them the YouTube link. Discuss its consequences, and build its implications into your advice.
Recognise and accept that most of your clients, i.e. probably about 90%, will have trouble deferring gratification.
Think about providing examples of your clients who have successfully deferred gratification to maximise long-term economic happiness. Jealousy and envy can be powerful motivators. Paint a picture strong enough to overcome your client’s human inclination to consume now and think later.
Create strategies that work with, not against, this basic human tendency. “Set and forget” works well, because without “set” most clients would just forget.
Perhaps something as simple as:
- increase salary sacrifice super contributions above the statutory minimum, by say $500 a month, or $6,000 a year, and then automating payment so your client forgets it is happening; and/or
- increase the home loan repayments by say $250 a fortnight, or about $6,000 a year, and then automating payment so your client forgets it is happening.
Think about how good your practice would be in ten years’ time if you could get every client to do this now? Think about the next 30 years, not the next 30 days. Defer your own immediate gratification to earn long-term rewards.