Why Marshmallows May Hold the Secret to Investing
The 1960s Marshmallow Experiment challenged the concept of instant gratification—and revealed a lot about how people approach saving versus spending.
The 1960s Marshmallow Experiment taught us about instant gratification. The premise: Eat a marshmallow now, or save it and receive double the reward later.
Just as waiting for marshmallows has a potentially greater reward, the key to building wealth is to steadily invest your money now, so that you’ll have more in the future.
Make investing money easier by using automated tools, such as Betterment’s SmartDeposit, a cash investment tool that puts more of your money to work.
It turns out marshmallows and investments may have something in common: They both offer a greater reward the longer you wait.
It all began in the 1960s when Walter Mischel, a psychologist at Stanford University, first conducted what is now commonly referred to as the Marshmallow Experiment.
What he found were some important learnings about people’s ability to delay gratification.
Here’s how it worked: Researchers put one or two children at a small table and placed a marshmallow in front of them. The instructor said he was going to step out for a moment, and the children could do one of two things:
- Eat the marshmallow now, while the instructor stepped out. Or,
- Wait a few minutes and, upon the instructor’s return, they’d receive a second marshmallow as a reward for their patience.
The logic seems simple enough: Wait a bit longer, receive a bigger reward—a concept also known as delayed gratification. But, while theoretically easy, it proved to be a herculean task for most of the 4- to 6-year-olds.
A critical study component was revealed when Mischel revisited the study participants more than a decade later. He found that those who waited for the second marshmallow (roughly 65% of the participants):
- Earned 210 points higher scores on their SATs.
- Were less likely to go to pieces under stress.
- Were more persistent in the face of difficulties, and,
- Were still able to delay gratification in pursuit of goals.
Clearly, being able to delay gratification for the sake of “larger later” rewards can help in many facets of life.
How does this relate to your investments? Just like with the marshmallows, waiting a bit longer for your money to grow can offer much greater reward than spending it today.
Why Marshmallows Are Worth Investing
For many of us, it’s hard to delay gratification. Americans spend the vast majority of their current marshmallows, with little consideration of the foregone future rewards.
In fact, Americans spend almost all of their earned income; in the last three years the average annual U.S. savings rate was 5.1%.
Spend extra money instead of saving today, and you may never see the long-term benefit of how much your money can grow over time. The key is figuring out how to resist the temptation of using that money today.
That’s why it is important to be disciplined about financial planning; this means finding the delicate balance between preparing for the future and living in the moment.
Avoid Temptation with Automation
If you’re finding it difficult to manually put money away, one strategy can help: Use automation to save before you have a chance to spend.
First, set up an automatic deposit, either through a direct deposit from payroll or an automated withdrawal from a checking account into a savings vehicle. Ideally you’d want it to withdraw the money right after your paycheck arrives. This helps to ensure your checking account consists of only what is safe for you to spend.
By automating, you remove one of the biggest hurdles faced when trying to save: exerting willpower to prevent yourself from spending money and instead saving it for later.
Another suggestion is to focus on the present amount of periodic savings, which is relatively small, and not on the long-term savings goal, which can feel overwhelming. The money saved today likely won’t infringe on your current lifestyle, but it could have a huge impact on your life later.
Betterment’s Automation Tools Help You Invest Without the Guesswork
Betterment automates your savings with total transparency and lets you know where you stand with your investing goals at all times.
The intuitive interface allows you to easily set up Auto-Deposit to deduct a certain amount of money out of your checking or savings account.
After a while, you’ll realize the whole time you’ve been saving and investing your money, you haven’t missed spending it at all.
To put even more of your money to work, you can consider rolling over a 401(k) or a traditional, Roth, or SEP IRA to Betterment—it can take as little as 60 seconds, making it among the fastest rollover process in the industry.
By investing with Betterment, you get a low-cost, globally diversified portfolio of index funds. We automatically rebalance your portfolio to help ensure you’re always taking on the optimal level of risk for your goal’s time horizon.
When you start a rollover, you can get up to a year free with Betterment. Learn more about rolling over at Betterment.com/rollover.
When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. The information on this page is being provided for general informational purposes and is not intended to be an individualized recommendation that you take any particular action.
Factors that you should consider in evaluating a potential rollover include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account and consult tax and other advisors with any questions about your personal situation.
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