Very often, we end up making tradeoffs between instant gratification and delayed gratification. What is Instant Gratification? You pay for a good dress, you can wear it immediately and enjoy whatever benefits it is supposed to bring to you. On the other hand, there are times when we do certain things, the benefits of which are not immediately apparent.
To illustrate this point, in a recent interaction with a set of MBA students from a reputed institute, I asked how many of them had an Iphone. About 30% said they had one. I then put forth this proposition to them: If you were going to buy an iPhone at a price of say, Rs 75,000, consider this alternative. Instead of an iPhone, you buy a cheaper phone at a price of Rs 25,000. The Rs 50,000 that you save in the process is invested in an equity mutual fund. Since it is reasonable to expect that people would change their phones every three years, at the end of three years, you again have the same choice: replace your phone with an iPhone or a cheaper phone.
You choose a cheaper phone again. The cost of iPhone might have increased to Rs 89,326 on account of inflation and the price of the cheaper phone might have increased to Rs 29,775 considering inflation at 6% p.a. The difference of Rs 59,551 is again invested in an equity mutual fund. Assume that this process is repeated after every three years. If the equity mutual fund grows at a compounded annual growth rate of 12% (which is not unreasonable given past performance), the picture would look something like this.
The value of the investment in equity mutual funds is estimated to be about Rs 5,33,698 at the end of ten years. This is assuming that the investment grows at 12% p.a. which is not guaranteed. The iPhone is used purely for illustrative purposes here. Instead of an iPhone, I could have chosen from a number of other items. The point is that by forswearing the meagre joys of immediate gratification you can obtain a significantly more substantial delayed gratification. In this case, by using a cheaper phone and by investing your money wisely, at the end of ten years, you could potentially have enough money to buy the best phone in the market at that time and perhaps a bike as well!
There are times when instant gratification can be more important for a person. It really depends on the individual’s choice. If an iPhone is really important for you, go for it. But please keep in mind that you are possibly sacrificing something bigger or more important that you could have had in future. Of course, all of this does not apply to people who have enough money to buy whatever they want!
There are times when instant gratification can be more important for a person. It is ultimately an individual’s choice and can vary from person to person. However, it is important to remember that instant gratification comes with a potentially hefty opportunity cost. And over the course of a lifetime, the potential gain from exercising that essential bit of self-control is certainly enough to make you think, “Do I really need that?”
(By G Pradeepkumar, CEO, Union AMC)