Thursday, November 16th, 2017
Close your eyes and think of yourself. A certain part of your just brain lit up. Now, think of a stranger. A different part of your brain just lit up. Lastly, think of yourself in 10 years. Guess which part of your brain illuminated? You might be surprised to learn it's the part akin to remembering a stranger.
That's right. When you think of you in the future, your brain is shouting "stranger danger"!
Hello! My Name Is...
How are you supposed to save for your retirement, forgo your weekly avocado toast and get your debt paid off? All for the benefit of some stranger? You can see the dilemma here.
Of course, it's hard to resist temptation now for some gain in the future. Remember the viral Marshmallow Test video, where those cute kids tried to resist one delicious sugar treat until the researchers returned? And if they did, they'd get two? Not all were successful in delaying their gratification.
Did You Eat Your Marshmallow?
Canadian adults aren't doing much better. They're not storing up their future marshmallows (i.e. retirement, being debt-free) and resisting temptation.
Professor Dilip Soman from The Rotman School of Management has a story, featured in the book Scarcity: Why Having Too Little Means So Much, that explains why we have a hard time making movement with financial decisions that could help us not only today, but in the future.
"To give you an example of a perception problem, some researchers were actually in Asia a few years back with labourers who earned cash incomes and they found that they made some strange decisions," he explains.
"For example, there was this flower centre in Shanghai. A woman wakes up every morning, she'll go get a loan to buy flowers, then she'll sell the flowers. She'll make enough to cover the loan interest rate of 10% per day. And then she'll splurge the last 50 to 100 rupees on a nice meal. And the question is, why won't she just set aside 50 of those rupees so that in 10 days she'll have enough to not need a loan?
"The thing is, she sees the problem very differently. And so, it was a perception problem. She wasn't even seeing it as a problem, unlike us. We said, 'Why would you pay 10% per day?'"
Professor Soman explains that this flower merchant thinks on a super short-term basis. She's going to bed happy, well-fed and her kids are happy too. And she knows she'll do it all again tomorrow. “She has security in the fact that [she'll continue this lifestyle] every single day," he adds.
Future You Will Arrive...Eventually
"Oftentimes people don't want to think about retirement, they don't want to think about health emergencies," Soman says. "And so, I think we don't emphasize those other areas as much. We need to start looking at the entire financial security journey starting from where you are now to your ideal point and chunk it down to small steps."
Professor Soman's advice on step number one? "Open an account!"
Many Certified Financial Planners recommend that you open an account like a TFSA or RSP, even if you don't have any money to start with. But the reality is, like the flower merchant, you, too, could likely find $25 dollars or more a month to set aside for the future you.
Get Your Financial Check Mark
Think of setting your accounts up like getting a few stamps punched on the card from your favourite juice bar or coffee spot – it positively reinforces your new behaviour and starts a series of actions that help you feel more confident about your finances. It may even help you connect more to that future you.