What does the Marshmallow test have to do with Financial Planning?

Category: Financial Planning&Investment

The Marshmallow Test, conducted in 1972, was a famous study that looked into how well children could control their impulses.

In this test, kids were given a marshmallow and told that if they could wait a short time before eating it, they would receive a second marshmallow as a reward. This study demonstrated that children who were able to delay their gratification showed the benefits of being patient and thinking about the long term.

How does this relate to investing?

Remember to invest for the long term instead of seeking quick profits. Just like the kids in the Marshmallow Test, investors face their own “marshmallows”—tempting but often harmful short-term choices. Many investors say they immediately invest their bonuses to avoid spending them. This practice of investing instead of spending is similar to the delayed gratification seen in the Marshmallow Test. By investing regularly and staying committed to this strategy, you can significantly impact your financial growth, much like the kids who waited for the second marshmallow and received greater rewards.

Avoiding Tempting Investments

As you invest, you’ll come across tempting opportunities like hot stock tips, cryptocurrencies, or NFTs that promise quick returns. These are like distractions that can steer you away from your long-term goals. It’s important to resist these temptations and stay focused on proven, long-term strategies throughout your investment journey.

Planning and Pensions

When it comes to long-term investing, it’s important to choose the right investment options, like pensions. Pensions are meant to be saved for the long term and cannot be accessed until you reach 55. This prevents hasty spending and encourages long-term saving. The waiting period helps you focus on the long-term benefits, similar to kids waiting for a second marshmallow.

Remember, tax-efficient accounts and pensions help your money grow more effectively over time through compounding. Compounding means that the returns on your investments generate even more returns. This can significantly increase your wealth.

Automatic pension contributions have led to better saving habits. Many companies and platforms now automatically enroll employees in pension plans, leading to millions more people saving for retirement. Some systems even increase contributions automatically, which encourages long-term saving even more.

The Role of Advisors

It’s important to understand the benefits of long-term investing, but it’s not always easy to stick to the plan. People often make quick decisions that can harm their financial future. A good financial advisor can help you stay on track, give you guidance and support, and help you focus on long-term goals instead of short-term temptations.

In summary, whether it’s the Marshmallow Test or investing, the lesson is clear: patience and self-control are key to achieving greater rewards in the long run.

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