What Eating Halloween Candy Can Teach Us About Financial Success

When I was a little kid, I used to look forward to being able to gorge on all my Halloween candy. It didn’t take long for me to realize what economists call “diminishing marginal utility.” Each additional piece of candy would bring me less pleasure than the last. It would eventually get to the point where eating more candy would only make me feel sick.

I soon learned to eat just a little bit at a time. This made my stash last longer and provided many more additional days of yummy treats. In a sense, this is what financial planning is really all about.

The heart of financial planning is what economists’ called “consumption smoothing” or basically trying to get the highest level standard of living that we can. In other words, it generally makes us happier to spend $50k each year for 2 years than to spend $20k one year and $80k the next because the pain of living on $30k less is typically greater than the additional happiness we get from spending $30k more. That’s why so much financial planning is designed to protect our living standard from either extremely higher expenses (medical bills, home and car repair, long term care) or extremely lower incomes (unemployment whether due to a job loss, disability, or retirement).

The challenge is that it’s hard to resist the fact that eating that additional piece of candy now does make us happier today even if it would make us even happier tomorrow. Unfortunately, human beings evolved to have what behavioral economists call “temporal discounting” or the tendency to overvalue present rewards relative to futures ones. So how can we overcome this bias? Here are a few lessons from saving Halloween candy:

1)      Don’t compare yourself to others. Watching the others kids eat a whole bag of candy will only encourage you to do the same thing. Just keep in mind that they’ll be the jealous ones once all their candy is gone. By the same token, don’t fall in the trap of  trying to keep up with the Joneses’ , at least when it comes to what you can buy. Instead, be the ant to your grasshopper neighbor and think about how much more you might be saving.

2)      Put the candy aside before you have a chance to eat it. Looking at the candy will only make it harder to resist. In the same way, leaving money in our checking account makes it likelier we’ll spend on something we’ll regret. Instead, sign up for payroll deductions to your retirement plan, HSA, and/or FSA before you have a chance to spend it. If it does end up in your checking account, set up automatic transfers to a separate savings or investment account.

3)      Store the candy someplace hard to get. This is an extension of rule #1. If it’s buried behind a lot of other things on the top shelf, you’re less likely to snag a few than if they’re on the counter as you walk by. One of the advantages of  401(k)s, IRAs, HSAs, and 529 plans is the penalties for early withdrawal. Even if they don’t actually amount to much, the words “taxes” and “penalties” can be enough to prevent us from raiding them frivolously.

4)      Eat some candy now. You also have to be realistic and allow yourself to indulge a little or else your self-control may break down altogether. The same is true when it comes to your money. Your budget should be realistic and allow for some small luxuries or even splurges on those things that are most important to you. That will help keep you from wasting money on the less important things.

5)      Don’t let your candy spoil. Waiting too long could leave you with a nasty surprise. While money doesn’t “spoil,” it does lose value with inflation. If you don’t need it for a while, make sure it’s invested to at least keep pace with inflation. Otherwise, you’ll discover that your savings actually buy you less in the future than they would have bought you today.

Finally, if you have children, it’s just as if not more important to pass this lesson to them. After all, the famous “marshmallow test” suggested that kids who learned enough self-control to delay eating a marshmallow for the promise of receiving more ended up doing much better in life on a whole host of measures.  That’s definitely a lot more valuable than the candy itself.

 

 

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