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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 [1] to take 60 students to experience the Junior Achievement’s Finance Park [2].

Delayed Consumption

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 [3].

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.