Marshmallows

Would you rather one marshmallow now or two marshmallows at some point in the future?

“Once you realize that will power is just a matter of learning how to control your attention and thoughts, you can really begin to increase it.”

- Walter Mischel, Author of The Marshmallow Test

In the 1960’s Walter Mischel, a Stanford professor, began a series of psychological experiments on children between the ages of 4 and 5 years old. The study began by bringing each child into a room with nothing but four walls, a table, a chair and one marshmallow. The child was left alone with a choice; eat the marshmallow now or wait until the researcher returned with a second, at which point they could eat both.

As you can imagine, some children ate the marshmallow before the researcher exited the room, others failed to wait the entire duration, but a few could delay instant gratification and suppress their desire for the entire 15 minutes. I’m not a Psychologist, but the Financial Planner in me has a hunch that the latter group will be more prepared for retirement.

Have you heard about The Rule of 72?

According to Investopedia, “The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.” This sure sounds a lot like the marshmallow experiment…

Consider an annualized rate of return of 7.2%. Your investments should double every 10 years (72 / 7.2 = 10). At that rate, how much would $1 be worth in 30 years from now?

I will save compound interest for another blog, but the short answer is that you could buy a lot more marshmallows with a little patience and discipline!