Life Is Just One Big Marshmallow Test - Ep #86

May 9

Welcome to episode 86 of the One for the Money podcast. In the late 1960s and early 70s, a famous psychological study was conducted that has since been called the Stanford Marshmallow test. The study was designed to explore the concept of delayed gratification. In this episode, I’ll share how life might be considered one giant marshmallow test.

In the tips, tricks, and strategies portion, I will share a tip regarding how to not eat the entire marshmallow.

In this episode...

The Marshmallow Test [0:36]
Delayed Gratification in Personal Finance [2:23]
Investing Rewards Patience [10:01]
Teaching Financial Discipline [10:46]

MAIN
In the late 1960s and early 70s, a psychologist named Walter Mischel at Stanford University conducted what has become a famous psychological study. The study was designed to explore the concept of delayed gratification — the ability to resist the temptation for an immediate reward in order to receive a larger reward a short time later.
Here is how the Experiment was set up:
600 preschool-aged children, roughly 4-6 years old, participated in the study. Each child was placed in a room with a marshmallow placed on a table. The researcher told the child that they could either eat the marshmallow immediately or wait 15 minutes without eating it. If they waited without eating the marshmallow, they would be rewarded with a second marshmallow.
The researcher then left the room, leaving the child alone with the first marshmallow.
The Key Findings as a result of this research were that Individuals had varied Self-Control: Some children immediately ate the marshmallow, while others were able to wait the full 15 minutes for the larger reward.
Now you might be wondering what a 4-6-year-old eating a marshmallow has to do with personal finance? Well, that’s what was most remarkable about this study was what the follow-up studies revealed. The outcomes were very successful at Predicting Future Outcomes: Over the subsequent decades, Mischel and his colleagues followed up with many of the children who participated in the experiment, and the results were astounding:
It found that the children who were able to wait for the second marshmallow, decades later, tended to have significantly better life outcomes in terms of higher SAT scores, lower rates of obesity, more likely to be financially stable as well as to have greater job satisfaction. The ability to delay gratification was a more accurate predictor of future success than their scores on an IQ test.
Now it should be noted that while the Stanford Marshmallow Experiment became a widely discussed study about the power of self-control, later research showed that the environment in which a child grows up, including factors like trust in caregivers, socioeconomic status, and stability, can influence how well they are able to delay gratification. For instance, children in more unstable environments may have less reason to trust that the promised later reward will actually come.
But suffice it to say, the Stanford Marshmallow Experiment remains one of the most influential studies in psychology, because it exposed the impact that self-control has on later life outcomes.
I’ve read about this study numerous times over the years, but recently it has led me to this thought: Is life really just one giant marshmallow test? Is delaying gratification part of the better planning one needs to implement to have a WAY better life?
As I thought about this more, I came to the belief that generally speaking, life is one giant marshmallow test and that individuals can both learn and develop the skills so they too can have much better life outcomes. It also seems to me that businesses and politicians can hijack our desires for immediate gratification to their advantage.
Individuals who can gain an understanding of the power of delayed gratification can have a much better life.
Let me provide just a few examples of where this is the case:
Credit cards are a tool for individuals to pay for goods or services and not having to carry around a bunch of cash. They are incredibly convenient. It’s remarkable how you can tap this piece of plastic on the machine and pay for things all around the world. You can use it to ride the tube in London, pay for some gelato in Rome, or buy some clothes in Bangkok. Credit cards can be a convenient way to pay for everything from groceries to travel. These can be decent tools provided you already have the money in the bank.
But far too often, individuals use these to pay for things they can’t afford right now, essentially eating the marshmallow now. Maybe they are a few weeks away from their next paycheck, so they use the credit card as a short-term loan. But one unexpected expense later, and wa-la, you have recurring debt. Credit cards are an easy way for individuals to “eat their marshmallow now", but too often, CC users pay dearly for it later.
This is evidenced by the tremendous revenue these credit card companies generate. In 2020, interest payments (which are made by people who couldn’t afford the original purchase) accounted for $76 billion, or 43% of all credit card company profits. Fees charged to stores that accept credit cards accounted for $51B or 29% of CC company profits.
But some might think, ah, but jokes are on the credit card company because I’m getting air travel points, etc. Nope, the joke is still on the consumer as credit card companies are recycling our own money for a steep fee. As I just mentioned, 29% of their revenues ($51B) come from the fees they charge retailers to accept their credit cards. These fees are around 3-4% on every transaction. The businesses don’t pay these costs, but instead pass those fees along to the consumers by adding 3-4% to the price. So the credit card company indirectly charges an additional 3-4% on every purchase and generously gives credit card holders anywhere from 1-4% in return in the form of cash back or travel points, depending upon the category of the good or service purchased. Oftentimes, those travel points are not used or come with numerous restrictions.
In fact, I recently purchased some marketing materials for my Better Planning Better Life business, and they included a 3% credit card processing fee charge on the invoice. I instead paid by electronic check to avoid the charge. It took some extra effort, but it saved me a few hundred dollars. I’ve also noticed a small sign by the cashier at the Greek restaurant near my office, which states that there will be a 3% charge for the use of credit cards.
For individuals who use Credit cards the wrong way, they are not succeeding at the marshmallow test. The average balance on a CC in America is over $6700 as of the 3Q of 2024, and those between 44-59 have an average balance of over $9500.
CC companies hijack consumers' reward centers by enabling them to eat the marshmallow now.
In the news recently, there was another example of how businesses make money by helping people eat the marshmallow. This isn’t via a credit card but through a microloan. There is an online lending company called Klarna, and they recently partnered with DoorDash to finance people’s takeout meals. This way, you could literally eat the marshmallow. Talk about your signs of the financial apocalypse. If we are at the point where people are financing their DoorDash, we are in for trouble.
Automobiles are another prominent way where many individuals fail the marshmallow test and eat it now. In episode 85 of this podcast, I share how data shows that over 80% of new car purchases in 2024 were financed, and the average monthly car payment is $742 for new cars and $525 for used ones.
Too often with automobiles, we eat the marshmallow. We falsely believe that because we can qualify for a loan that we can afford a car. For some individuals, it can make them feel good initially that they can “afford” such a nice car. But if you aren’t paying cash, then you really can’t, but there are plenty of banks and car companies that would be happy to finance the belief that you can. As I shared in episode 85, Americans aren’t becoming automatic millionaires... because they’re spending too much money on automobiles. Because they want the new car (ie, marshmallow) now, they are spending tens of thousands of dollars on vehicles and not saving this money instead.
Credit cards and auto loans are too often used to essentially rent a lifestyle we cannot actually afford. If you can’t pay cash, you can’t actually afford it.
There are positive aspects to the marshmallow test. Investing is a great form of the marshmallow test. For those who can wait, the rewards are nothing short of astounding. The incredible power of compound interest requires an extended period of delayed gratification, but given the magical ingredient of time, miraculous things can happen.
For example, if you made a one-time investment of $10,000 and it grew at a rate of 10% per year for 4o years, it will have grown to over $ 452k. And if you invested $10,000 each year for 40 years, your $400k total investment would grow to over $ 4.8M. That’s the power of waiting for the additional marshmallow.
Now, does that mean we should just delay gratification in every aspect of our lives for as long as possible? Certainly not. In many episodes of this podcast, I’ve shared the importance of spending one's money on experiences throughout their lifetime. The problem is that far too many spend other people's money on those experiences, namely the credit card or auto financing companies, and consequently, pay more for that experience in the end, and then have fewer experiences later because they financed the first few ones.
My general rule of thumb for budgeting is focused on not eating the marshmallow. I call it the 20/50/30 budget, which is a play on the 50/30/20 budget idea. I use the 20/50/30 order intentionally because your first 20% should go to savings (paying yourself first), the next 50% of your budget should go to your needs (food, clothing, shelter, transportation, healthcare, etc), and the remaining 30% can go to your wants.
By spending what is left after saving instead of saving whatever is left after spending, make certain you don’t eat the marshmallow now, but will enjoy many marshmallows later.
It’s important to note that if you’ve eaten the marshmallow too quickly in the past, it doesn’t mean you won’t always do so in the future. As I’ve shared throughout these episodes on this podcast, I’ve eaten the first marshmallow many times and made plenty of financial mistakes (borrowing money on a credit card, buying cars and other things I couldn’t afford) but I later corrected those mistakes and did enough things right, that it has worked out for a much better life. Sadly, that was not the case for many of my family and extended family. I have relatives who had noble professions, made great incomes, but had nothing in the way of wealth because they consistently ate the marshmallow. I was also richly blessed with two loving parents, who taught me the value of showing reverence to God and his creations they also taught me the importance of serving the unfortunate and, showing kindness to all people, the also showed me how to work hard and obtain education, but unfortunately, they didn’t teach me much about personal finance or not eating the marshmallow. Directly at least. Indirectly, my parents and other relatives gave me a lot of good examples of what not to do. Which was sad because they were all so incredibly kind and decent, and their lives could have been so much better.
I share all of this because it's imperative that we teach our children and grandchildren the importance of delaying gratification. If you didn't come from a financially responsible family, you need to make sure a financially responsible family comes from you. Set a good example. Don't make money a taboo topic. Teach kids the things you wished you learned about waiting to eat the marshmallow and the times you didn’t. Both your good and bad examples will be hugely helpful. Otherwise, if you leave financial assets to your family without financial education, it is almost a guarantee that they will be wasted.
Delaying gratification and not eating the marshmallow now makes certain that we consider the future in our financial choices. As I share with people, I always represent two people when I develop a financial plan. They initially believe, I’m referring to me and them. But the two people I actually referring to are their present and their future self, and my sole job is to make certain that both of them are happy with our decisions.
TIPS, TRICKS, AND STRATEGIES
Welcome to the tips, tricks, and strategies portion of the podcast, where I will share tips regarding how to get better at delaying gratification.
One thing that is helpful to me is paying yourself first through automatic contributions to your 401 (k), IRA, or non-retirement account. This is the 20% in the 20/50/30 rule I discussed earlier. It gets even better when you periodically increase the contributions to these accounts. It’s the set-it-and-forget-it plan to build wealth.
Another thing that is helpful to me is to have something I’m looking forward to in the future. It’s much easier to delay gratification now if I know I’m saving the money for a much better experience later. For example, I can skip eating out at restaurants in southern California for the next six months if I know I will get to use this money instead to eat gelato in Florence or Pad Thai in Bangkok. It should be noted that delaying gratification isn’t always about waiting years or decades to spend it, but that you can delay it for just a few weeks or months instead. These experiences can then help supercharge your ability to further delay gratification because you know what experiences they can provide.