The hyperbolic power of now
Join me in a journey to save your first $1,000. This is the first $1,000 that you put aside for future you. The first $1,000 that you will trust yourself to never touch. But we have to overcome the first and hardest hurdle to saving and trusting ourselves with that $1,000, and it is the hyperbolic power of now. Let me ‘splain…
The brain is weird. It does all this stuff to help us, like, evolve and protect ourselves, but when it comes to money the wiring messes us up. One way the brain is weird is through adaptation. The very thing that helps us adapt to warmer or colder climates, stressful or peaceful situations, to live fully, is the very thing that wants us to adapt to all our dollars in a checking account (adaptation level phenomenon—stay tuned for THAT blog).
But the weirdest one of all is one that causes us to make super bad deals between current and future self. There is a simple mechanism called discounting that if we were rational would make us automatically save. Basically, we would make sober trade-offs, $1,000 today or $1,060 in a year. That’s a 6% rate of return. Savings accounts right now barely pay 1%. Our rational selves in a rational world would be wise to choose it.
But we don’t. Because we need that money. Today. $1,000 would buy that mattress. We CANNOT sleep on that old lumpy mattress, not a second longer. Nope. Think of the money I could make if I slept better. I can save next year. When I make a lot more money.
$1,000 is miraculously how much it would cost to head to the beach. All families take vacations every year. Our kids deserve it. We value vacations, and it is important to build these life experiences now while our kids are young.
$1,000 would help us send our son to soccer camp. That is his passion. We can’t take it away from him. This could be his one chance at getting the training he needs to stand out.
Literally, I have written three compelling reasons I could spend $1,000 right this second. I would sign up for any one of those and believe that they were far more important than saving. And I hear clients give me these same rationales ALL THE TIME. They are equally convincing. I believe them. They believe them. Of course you should spend the $1,000. Of course this is a TERRIBLE TIME TO SAVE.
I have learned one thing after working with docs transitioning from making $60,000 to, within months, making $250,000, $400,000, or even $800,000. The number doesn’t matter. We can spend it all. We can figure out just how urgent this year’s home remodel, the big vacation, the expensive services that we can hire to help us out from nannies to housekeepers, etc. We actually can convince ourselves that at any income level, it is just so lucky because it happens to be just what we need, deserve—we were destined coincidentally to live that exact lifestyle provided by that exact dollar amount.
Basically, I have learned humility. Most of us do occasionally look back at our early 20s or college years and wonder how we could make so much more money but not be able to part with it. Remember how broke I was? We can judge the human condition, and we are so good at beating ourselves up. Or instead, what I hope you take away, is that we can look at ourselves with curiosity. Could we possibly be victims of the hyperbolic power of now?
The theory of hyperbolic discounting is that we don’t have a normal discount rate. We don’t have normal tradeoffs. We are so well acquainted with our current condition and so compelled to serve it that it takes a lot more than rational economics says it should take for us to put money aside for later. For instance, let’s say you have a goal to save $1,000 this year, and that means you would need to put $83 per month into a savings account to save it.
Unless I told you that the $83 you are putting this month would attract, say $100, or more in a year you might not be inclined to save it. So I might have to tell you that I would more than DOUBLE your money to convince you to save. That is completely irrational. However, you might be willing to start saving $83 next year if I promised to give you a 6% rate of return on those savings after a year. Your brain fully understands and values that theoretically, but right now you have too many things you need that $83 for. So future self gets to be rational. Current self not so much.
Does that make sense? Now do you understand the monumental and urgent task of saving right here/right now in the moment? Do you see the trick our brains play on us?
Let’s say you make $120,000 a year. Do you desperately want to buy a yacht? Like, you are looking at yacht models and have picked the perfect one. You just need the money to pull the trigger? Of course not. But think about the decisions you might make at $120,000 that are normalized for you that would have not been in the realm of possibility when you were making $35,000 out of college? Maybe picking out the new model SUV. Maybe buying that expensive mattress.
The person picking out the yacht style is someone who might have made $35,000 out of college but has struck it rich in the tech world and makes a couple million a year. The scale of urgent “now” wants has simply grown.
So the idea that there is one lifestyle that we could simply achieve that somehow we were born predestined for is the trap. Our brain that adapts so well desperately wants us to think it, and that’s why the available dollars in the moment are far more important than available dollars in the future.
What’s the answer? So far shame, fear, judgment, regret, spousal arguments, credit card debt, etc. have been the approach to the hyperbolic grip and power of now.
But here’s another idea. What if you decided to trick your brain? What if you only allowed your brain to see a portion of your money after you have saved for the future? Turns out that works pretty well. And it works absolutely best when you can set up this mechanism before you even make your first dollar, before your brain gets to adapt to your pay.
The way to do it? Never let your savings hit your checking account. Have that $83 per month sent away. To an account you barely remember exists—not an account with easy transfer access to your main checking account. We will get to the technicalities of that in next week’s blog. Studies repeatedly show that money payroll deducted straight out of a paycheck into some account that is tough to get to is how people successfully save for the long-term.
But in a year you will remember that account, and you will go check on it. Suddenly there is $1,000 in that account. You believe so much in saving at this point that you realize the power of the delay. It’s proof in your account. And you are not looking back. See, the next month’s $83 will be much easier from here.
Ok, so deep breath. And here is what I hope you will do for the next week. Look at your brain and thought processes. Listen to any words you speak about plans to spend money or about money just spent. See if there might be a story of adaptation. Don’t judge it. Don’t beat yourself up about it. Just observe it and kindly chuckle at it. There’s that ‘ol hyperbolic discounting again. Wink wink.