The Marshmallow Test is a psychological experiment designed to determine a person's ability to delay gratification and plan for a richer future. While managing money isn't all about sacrifice, it does involve balancing today's priorities with tomorrow's possibilities. Let’s learn why financial planning is the ultimate marshmallow test and explore some tips on how to pass it.
What is the marshmallow test?
The Marshmallow Test is a now-famous psychological experiment designed to assess a child's ability to delay gratification. The test was first administered by psychologist Walter Mischel at Stanford University in the 1960s. The experiment involves placing a child in a room with a marshmallow (or other tempting food) and giving them a choice:
- The child can eat the marshmallow immediately.
- If they can wait a designated amount of time (usually around 15 minutes), they are rewarded with two marshmallows.
The main goal of the experiment was to see how long children could resist the temptation of immediate rewards and their ability to delay gratification.
- Watch videos of kids struggling with decisions. These are heartwarming and hilarious.
Preliminary results from the Marshmallow Test and follow-up studies suggest that children who are able to delay gratification have better life skills, academic performance, and social and emotional health later in life.
It is worth noting, however, that subsequent analysis somewhat overturned the conclusions of the marshmallow test. Social trust, socioeconomic background, and other factors influence a subject's ability to succeed on the test.
Why managing your finances is the ultimate marshmallow test
While the actual marshmallow test may not be an accurate indicator, there is no doubt that planning for future abundance is the secret to success in life.
Managing your money can be considered the ultimate marshmallow test because it requires many of the same skills and characteristics associated with success in classic psychological experiments:
delayed gratification
Both Managing Money Effectively and the Marshmallow Test involve the concept of delayed gratification. When it comes to personal finance, it's crucial to postpone immediate spending impulses in favor of saving and investing for future goals. This is consistent with the idea of waiting for a larger reward in the marshmallow test.
self control
Successful money management requires self-control. This includes resisting impulse purchases, sticking to a budget, and avoiding behaviors that could jeopardize long-term financial goals. In both cases, self-control is a key factor.
long term planning
Just like the marshmallow test, managing money effectively requires long-term planning. This includes setting financial goals, creating a budget, saving for retirement, and making strategic investment decisions. People who excel in these areas often demonstrate the ability to plan for the future, like children who can wait for the second marshmallow.
- Use Boldin Retirement Planner to help plan for the long term.
Address financial challenges and risks
The marshmallow test and personal finance both involve meeting challenges. In personal finance, individuals may encounter inherent risks, such as unexpected expenses or market fluctuations. Being able to navigate these challenges, make informed decisions, and stick to your long-term financial plan is critical.
- Improve your ability to handle financial challenges by running “what-if” scenarios in the Boldin Retirement Planner.
financial discipline
Successful money management requires financial discipline. This includes sticking to a budget consistently, saving regularly, and making smart choices about spending and investing. Financial discipline is a key trait shared by people who delay gratification on the marshmallow test.
goal setting
Both situations involve setting goals and working toward achieving them. In the marshmallow test, the goal is to wait for the second marshmallow. In terms of money management, goals might include saving for a family, funding education, or achieving financial independence. The ability to set goals and work toward achieving them is a common factor.
Average Social Security Start Age: A Real-Life Example of Failed Financial Marshmallow Test
According to a report from the Center for Retirement Research at Boston College, 90 percent of Americans begin receiving Social Security retirement benefits at or before full retirement age. In fact, the most common starting age is 62, which is the earliest age.
In many cases, this is an example of failing the personal finance marshmallow test.
If you haven't started collecting Social Security yet, one of the best things you can do to live more comfortably is to wait until at least normal retirement age to collect benefits.
- If you've reached normal retirement age (66 for those born between 1943 and 1959), you can receive 100% of your benefits.
- Each year thereafter, until age 70, your benefit will increase by 8%, meaning you will receive 32% more benefits at age 70 than you would at age 66.
- If these benefits are received below normal retirement age, benefits are reduced based on the number of months you receive benefits before reaching full retirement age.
example: If your full retirement age is 66, your benefits are reduced by 25% at age 62; at age 63, it's about 20%; at age 64, it's about 13.3%; at age 65, it's about 6.7%, according to the Social Security Administration.
People who claim benefits early will give up nearly $100,000 in benefits over their lifetime.
Psychological Tips to Pass the Financial Marshmallow Test and Increase Wealth and Security
1. Quantify the benefits of delayed gratification
Olivia Mitchell is an economist at the Wharton School of the University of Pennsylvania. She tested some ideas that might help people make the “right” (more profitable) decision about when to start Social Security.
Mitchell conducted an experiment. She offers different kinds of incentives for people who delay starting to receive Social Security benefits, and the results are interesting:
- If potential Social Security recipients were told the difference between claiming benefits at age 62 and deferring benefits until age 66, 50 percent chose to defer.
- If people needed to work while waiting to receive benefits, only 46% chose to postpone.
- However, what if the researchers promised recipients that if they delayed receiving it, they would receive $1,000 per month and a lump sum of $60,000 at age 66? Subsequently, the willingness to procrastinate increased to 70.3% (no work while waiting) or 55.5% (half-time while waiting).
So getting a lump sum seems like an interesting incentive for people to delay starting Social Security.
2. Focus on future returns and have a goal
For children who succeeded on the marshmallow test, the goal was to get two marshmallows, not one.
If you're trying to make good financial decisions that will benefit your future wealth and security, you may want to focus on your retirement date or other financial goals. Do you want to buy a vacation home? Sponsor your children to go to college? Travel the world.
Keeping your goals and priorities in mind as rewards for your future can help you make better decisions today.
3. Distract yourself
Some children who succeed on the marshmallow test find ways to distract themselves from the temptation of the immediate reward. They look away from the marshmallow, sing a song, or engage in some other activity to escape temptation.
If you are faced with short-term financial temptations but need funds to achieve long-term goals, it is important that you learn to focus your brain on something other than your short-term desires. So if you really want to splurge on a weekend ski trip but know it's not in your budget, refocus your short-term thoughts on activities that are more affordable and closer to home.
4. Use your imagination
Some kids who were able to wait and get two marshmallows used their imaginations. They thought about negative and positive future possibilities and examined the rewards and consequences of their actions:
- If researchers or parents give in to temptation, they will be disappointed.
- They have the ability to taste two whole marshmallows.
You can imagine your income decreasing as you age. And, you can imagine the joy of reaching your savings goals, enjoying a comfortable retirement, or achieving financial freedom. Imagining the future is an effective and proven method of promoting good long-term decision-making.
5. Make it a habit
It turns out that many children who insist on two marshmallows have developed the habit of delayed gratification in their daily lives, making it easier to wait for extra marshmallows.
Discover 17 micro-money habits for greater wealth and peace of mind.
6. Manage emotions
Emotions, especially fear and greed, can wreak havoc on our finances. It’s important to understand the role emotions play in our financial decisions.
Financial decisions, whether related to investments, budgets or major purchases, should ideally be based on rational analysis and a clear understanding of financial goals. Emotions such as fear, greed, or panic may prompt individuals to make hasty decisions that deviate from long-term plans. For example, during periods of market volatility, fear of potential losses may cause someone to rush to sell an investment, thereby missing out on potential long-term gains. On the other hand, over-optimism and overconfidence can lead to risky investments that may not be consistent with one's risk tolerance or financial goals.
Learn more about behavioral finance and how to outsmart your brain for more wealth and a better future.
7. Hold accountable
Having someone hold them accountable can help some kids resist temptation.
Sharing your financial goals with friends, family, or a financial advisor can also help you succeed financially. Seeking support and encouragement can help you stay on track.
8. Make a plan
Children who had a plan, whether by distracting themselves or imagining the marshmallow as something else, were more successful at delaying gratification.
Creating a financial plan that includes a budget, savings strategy, and investment plan is the ultimate way to pass the financial marshmallow test. And, Boulding Retirement Planner is your road map. It can guide your financial decisions and keep you on track.
Start executing your plan today.
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