Weekend Bytes
Can you pass the Marshmallow Test?
In a popular experiment in the 1960s, some children were given a marshmallow each - but were told if they wait for 15 minutes and not eat, that they would be given two instead. They were then left in the room, and some obviously couldn’t wait, while some did. Records were made of which children ate the marshmallow, and which ones waited. Follow up studies showed how the kids who waited turned out to do much better in line across parameters, such as education, health, wealth and success.
A similar test happens with us every now and then. A lot of our discretionary purchases, such as cars, mobile phones, electronic goods, often can be bought with a delay of a few months and in the process we can be sure we need the stuff, be financially prepared to buy it or even avoid borrowing for the same.
An alarming trend in India has been the rise of BNPL (Buy Now Pay later) usage. According to reports, credit penetration has risen from about 20% in June 2020, to around 30% in 2023. This is driven by the proliferation of BNPL, where consumers are choosing to buy and consume now, and pay for it later, along with interest.
By doing so, we end up buying things today using future savings – a rat race that ensures our ability to achieve financial independence is much lower.
Next time you have such a purchase coming up, we would like you to consider the below example
What if instead of paying the EMI for six months, you could have waited for six months and then made the purchase?
What if you invested in an SIP in a Fixed Income fund that aligns with your horizon, and then bought that same mobile?
The difference in total cost for you could have been ~6%! (Difference between 44,330 and 46,989 shown in the examples below)
2 ways to pay for Rs 45,000 - BNPL & SIP
What if you planned for it 1.5 years in advance? The difference in total cost could have been ~18%! (using similar calculations as the one shown above, assuming 18 month EMI vs 18 month SIP)
And these are just total savings, assuming you bought the same thing. When one plans a purchase, or delays gratification, that often leads to more reasonable purchases and eliminates impulse buying.
So the next time when you have a large purchase to make, think of this example and ace the Marshmallow Test.
Achieving most important things in life require continuous efforts. Your financial journey needs them too.
It’s called Zindagi Ke Liye SIP (Click to know more).
