The Exponential Power of Delayed Consumption
This is a guest post by Todd Campanella. Todd is a 34 year old married dad of one. He has a finance degree and an MBA; he teaches middle school math. He recently wrote a grant and received $1000 from ING Direct to take 60 students to experience the Junior Achievement’s Finance Park.
You heard it before, if you want to save $250,000 over a lifetime, stop leasing and drive every car you own for ten years. This is a textbook example of delayed consumption. With the car scenario, the financial impact is very impressive due to the costs associated with buying a car every three years.
These days an automobile accounts for a huge percentage of the average person’s gross income and net worth. In a nutshell delayed consumption is putting off buying something either because it doesn’t make sense in your life now or because you are about to purchase something spontaneously and the angel on your shoulder tells you, “Don’t buy it.”
Today you read about how some new cars can be less expensive than the same car that’s 1-2 years old and how the automakers in Detroit is marking down cars $10,000 off MSRP. I am sure some people that don’t even need a new car will go out and buy one because it is the deal of a lifetime. Heck, it makes for a great dinner party conversation and demonstrates your knack for being and smart buyer. This is not responsible financial decision making. For most people, a car is the second most expensive item you will ever spend your money on, after a house. And most people take this plunge every three to five years!
Keeping My Financial Ship Afloat
Take it from me….a regular guy with an MBA that never used it. A career changer turned math teacher with a household earned income $25,000 short of six figures. I have a stay at home wife, a fourteen month old, one more on the way, and a mortgage that is the size of the price tag of a small townhouse in the suburbs. I have to be good with saving and investing in order to keep my financial ship afloat! How do I do it? Primarily delaying the consumption until it is needed.
Delay that finished basement until the kids can go down unsupervised. It makes no sense to put it in just for my wife to complain it’s too dark and dingy. Delay that hardscaping until global warming allows our family to use it at least 6 months per year.
Don’t install that sprinkler system until I can’t physically go outside with my own two feet to move the sprinkler around the yard once per week when it hasn’t rained that week. Don’t get lawn service until both my kids are finished taking naps. I can get my lawn cut in one in a half hours flat! And say no to the flat screen television until the three I purchased in 1998 burn out.
Delaying Home Ownership
Taking into account the current real estate crisis, consider how much money could have been saved if a young married couple put off purchasing a home in 2005. Since then, not only have prices decreased 20-40% but President Obama is in the process of distributing a nice tax credit to first time home buyers.
Not to mention that interest rates have also hit historic lows. Cheap money for borrowing! This average couple in the average town could have saved roughly $50,000, considering these three events that unfolded between the end of 2005 and early 2009. What a windfall! But too many people wanted part of that great American dream!
A Willing Mind
We can go on and on by addressing how much additional money could have been saved over thirty years by obtaining an interest rate that was below the going rates in 2005. You get the picture.
The moral of the story is that delayed consumption (aka: financial self-control) is something that parents and schools don’t seem to teach children. There is a strong physiological aspect to this topic and we know that the mind plays an important part in achieving health, wealth, and overall well-being. If delaying consumption is instilled while young, the easier it is to control and manage in later years.
Teaching delayed consumption doesn’t require rote memorization or knowledge of mathematical properties. It is not difficult to teach however it is limited by the mind’s willingness to do it. It is one of the most critical lessons for young people to learn if they are to go on to achieve financial independence without ever someday earning a six figure income.
I’m a little concerned with the inconsistency of applying the “delayed consumption”. Specifically, the point of comparing a couple buying a house in 2005 vs. waiting until today. Yes, the delayed consumption worked in their favor…but what of the couple who can buy a house today vs. waiting until 2012? Will they come out ahead by delaying the consumption?
You can make the claim “Yes, use their down payment money now for investing, and when the market is rebounded in 3/4 years, cash out for a profit.” But what if the rise in home values is greater than the profit they make (in whatever fashion they use their money – cash, invest, etc.) Doesn’t the delayed consumption HURT them down the road in this instance?
Just food for thought.
@Tyler I think that’s missing the point a bit. The house illustration was just an example of what COULD happen. In general, the concept of delaying purchases means you buy less stuff over your lifetime and therefore don’t spend as much money.
There will be plenty of time to save money when we’re dead. There will never come a day in your life when you wake up and say, “hey. I think I am ready to start consuming, now”
Leasing is designed the same way our lives are designed: Temporary. While we’re here, we might as well get the most out of every minute of it, because we can’t take our cash with us when we die.
Just what are you going to save all that money up for?
I agree with Todd’s guest post in principle 100% but disagree with some of his examples.
I agree with Tyler’s comment. Benefits of delaying home ownership from 05 – 09 would have been luck. You cannot predict housing prices accurately let alone interest rates. People who got in over their heads in the mid to late 90’s were handsomely rewarded.
If you can save 10K off a new car but otherwise would have waited a year or 2, it’s a smart move to buy that car now. Not to mention whatever you are driving today will be worth less further down the road.
I understand the sprinkler example, but what’s lost in the post is that a sprinkler system is relatively cheap when you consider the payoff of making your life easier and making your property more attractive when you want to sell.
Spending 1 & a half hours mowing your lawn is smart if you otherwise can’t afford it as is putting off refinishing a basement until you need the space (then again like a sprinkler you’ll get some of that money you put into it back, so you might as well get some enjoyment out of it).
Todd, as a Math teacher I can’t believe you resisted putting a mathematical example to the power of delay!
I have a better understanding now – it’s not “if you need it now, wait a year or two to buy it to save money”, it’s “do you really need it now? wait a year or two to see if it’s really worth it”.
So what’s your point 😉
Our consumer culture has bought into the “Buy now, pay maybe” idea. They believe the “You deserve it” slogans, and treat themselves accordingly. People think they deserve an increased level of comfort just because they’ve lived for a certain amount of time, regardless if they can afford it.
This article says too many times ‘textbook’…..
If that was the case, then I would not be alive and typing.
I practice the rules of driving cars into the ground.
I practice the rules and have $250K in the bank, and another $250K in investments and another $250K in 401(k)…..The point is that if you do this with cars, house, things that you use, and repair as much as possible (instead of replace), you then come close to what Japanese, Chinese, Indian, Koreans and other Asians do for a living. I have learned a lot from watching.
My 1992 Mazda and 1996 Ford works like a charm and I have a Spanish garage guy that repairs it for me. He loves me since I pay cash.
Buying a home, not having any debt, use credit cards with points and pay off when I receive the bill, get new cards every 90 days to get more free points, maximize on freebies and never give up on one goal> SAVING is working well for me and my family.
This allows us to make trips to UK (just returned) and next trip will be to Australia.
Please follow ALL of these rules. I have learned them from the school of hard-knocks and here you have listed them ALL. What a smart guy, and now you have the smart moves to make (reader). Do it and you WILL WIN.
Thanks for listening.
“That’s gold Jerry! Gold!”
Is double entry bookkeeping and/or accounting taught in schools?
Some people consider learning double entry bookkeeping part of being educated.
I was thinking these days when many people are handling retirement investing. Now it is quite important for most every one to know double entry bookkeeping. If one does not understand double entry bookkeeping one is at a huge disadvantage when evaluating stocks and securities.
You are in a position to teach double entry bookkeeping.