Wealth is a source of freedom, and self-discipline is the single most important trait you can have in your wealth-building journey.
In this article, I cover the following topics:
- Why delayed gratification is central to personal finance;
- Core concepts of opportunity cost and the compound effect, to change the way you look at money;
- How short-term suffering in the face of failure can improve your income and investing capabilities;
- The importance of habits; and
- How to improve willpower and use it efficiently.
Why Self-Discipline is Key to Build Wealth
Future Self Versus Present Self
Personal finance is a constant battle between the present you and the future you. Your wealth will grow exponentially under compound growth if your future self can win these small battles on a consistent basis.
The book Thinking Fast and Slow gives awesome insights into the workings of the two systems, where the emotional mind is termed “system 1” while the analytical rational mind is termed “System 2”.
The logical reasoning of System 2 has the best interests of future you in mind. However, System 1 is impulsive, emotion-driven, and biased. System 2 must consistently expend efforts to discipline and control system 1.
You are Programmed for Instant Rewards
You are biologically programmed to favor instant gratification. Our reward system was built to keep us alive thousands of years ago when the environment was much different.
Back in the day we were more likely to survive if we ate now, conserved energy now, and maximized caloric intake as soon as extra calories became available. Our biology has remained the same while the world around us has evolved rapidly.
Today’s environment is characterized by instant satisfaction and distraction. It is simply harder to stay on track to meet our long-term goals than it was a few decades ago.
Artificial sources of stimulation are everywhere. We have a device in our pockets constantly trying to kidnap our attention. Social media increases pressures to show off, we have easy access to credit, and there are low barriers to high-risk investing. Finally, nearly all companies apply human psychology to marketing. They leverage our primal instincts to buy their products.
Our current environment triggers our temptations to impress others, to borrow from the future and to get rich quick. These short-term temptations reduce our quality of life in the mid/long term if we aren’t careful.
Delayed gratification is more important today than ever before.
What is Self-Discipline
- “Control gained by enforcing obedience or order”; or
- ” A prescribed conduct or pattern of behavior”.
Discipline Equals Freedom
“Discipline Equals Freedom” – Joko Willink.
The quote is one of my favorites. You cannot be free until you can control your system 1 impulses, emotions, and desires. That requires self-discipline.
Joko’s quote resonates across all domains of life where we want to improve. He devoted an entire field manual to the topic, titled “Discipline Equals Freedom“. Any valuable improvement requires discipline; it could be getting a promotion, losing weight, being a better partner, or improving knowledge, experience, and skills.
Improving financial health and wealth provides freedom. You gain freedom from money-related anxiety, freedom to move jobs, and time freedom once investment income can cover basic expenses. At this point, you have the freedom to work where you want, eat what you want, travel where you want, and buy what you want.
And it doesn’t end with you. Self-discipline allows you to build long-term generational wealth. Build enough wealth, and it will grow and cascade along with the generations. Self-discipline, when applied to your finances, can unlock freedom for you, your family, and your children’s children.
The Opposite of Self-Discipline: Borrowing from The Future
The opposite of delayed gratification is to steal gratification from the future to make today better.
Credit card debt is a good example. Say a guy, Simon, spends $10,000 today, equal to $10,000 of a credit card debt. The card has a 20% interest rate. Simon now has to pay $2,000 each year in interest, on top of the $10,000 he owes back.
Booze is another example. Alcohol steals present enjoyment from the future. Drinking tonight will make me feel great, however, I will pay for it tomorrow. I would have stolen tomorrow’s pleasure and used it tonight. I’ll have reduced my ability to read, write, and hit the gym tomorrow.
Self-Discipline and The Three Pillars of Wealth
Saving money and investing it for the future is delayed gratification by definition. The act of sacrificing today’s spending for a better tomorrow.
I like the definition of money by Ben Felix. Money moves economic value through time. So, it can move gratification through time, if you believe that spending money brings gratification.
Expense Management: Self-discipline is needed to combat short-term impulsive desires in favor of long-term investing. A viewpoint is that $1 saved today is $2 in 7 years or $4 in 14 years.
Investing: Without disciplined emotional control, we may buy dangerously speculative investments due to fear of missing out. We may sell investments at terrible times due to panic imposed by market downturns. Investing can quickly turn into gambling without disciplined emotional control.
Income: Income increases when we apply our valuable knowledge and skills to solve complex problems. How do you develop knowledge and skills? Through some sacrifice, today to read, practice, and learn from failure.
Here are a few direct examples of discipline in action across the three pillars.
– Resisting Urges to Show Off
– Automating a Forced Saving Program
– Waiting 7-Days Between an Urge and a Big Purchase
– Avoiding high-interest consumer debt.
– Resisting Get-Rich-Quick Urges (Gambling)
– Controlling human biases such as loss aversion, over-confidence and herding.
– Reading vs. Watching TV
– Working on a Business Instead of Partying
– Learning from failures rather than quitting
– Forming action-based habits
Opportunity Cost and the Compound Effect
What is Opportunity Cost
The opportunity cost is the benefit of the next best alternative that you miss out on when a decision is made.
It is a way for us to bring future benefits into the present for side-by-side comparison.
Opportunity cost gives you a way of thinking about decisions in the face of limited resources: time, money and energy. And the concept doesn’t only apply to finances. Minimizing opportunity costs will help you us your limited reserves of time and energy in the best possible way.
The beauty of opportunity cost is that it also accounts for the complexities of your unique personal situation. Your time, money, and energy will have a “best use” that is unique to you.
Now we need to understand the compound effect so that we can consider the opportunity cost of spending money today.
What is the Compound Effect?
The compound effect is when your money earns you money, and this earned money earns you more money. This cycle repeats.
It is exponential growth. It’s the reason that your money can work harder than you, givn time.
The example shows the compound growth of $1,000 at a 10% return. You receive a $100 return in the year 1. Now you have $1,100. In year two you earn 10% on $1,100, equal to $110. After 20 years your $1,000 has grown to $6,727.
When considering compound growth, we must ask if the purchase is worth the sacrifice of a 7% return on our money? The average annual return of the global stock market over the past 100 years is 7.3%.
Opportunity Cost and The Compound Effect: Delayed Gratification
Due to compound growth, a small sacrifice today can result in huge returns down the road.
The opportunity cost is the compound growth that could have been.
My spending automatically tightened up when I fully understood this concept. I started looking at every expense as dollars I could have had tomorrow. The cool part about personal finance is that you can calculate the opportunity cost numerically.
For example, the opportunity cost of spending $1,000 today is $2,000 in 10 years from now, assuming a 7% compounded return. We can now answer the question: Would I rather have the [insert $1,000 item] today, or $2,000 in 10 years from now?
You could also look at opportunity cost in terms of cash flow. I can easily get a 4% annual dividend while the $1,000 continues to increase. So $1,000 could provide me $40 a year for life, while the $1,000 principle will grow as well.
Opportunity cost is a powerful tool. It forces you to consider the future compounded gain you are giving up by spending today. A perspective laced with opportunity cost will improve your financial and non-financial wealth.
Self-Discipline and Failure
Failure sucks, yet it is an amazing teacher that can take you to another level in your wealth-building journey.
You only have two options in the face of failure:
- Give up and quit; or
- Reflect, learn, adapt and improve.
Pushing through the uneasy and difficult feelings associated with failure requires self-discipline. Without discipline, we will take the easy option and quit.
- Lost money investing due to panic selling? Great, learn from your errors, don’t repeat the same mistake, work on controlling emotions and you will be a better investor.
- Failed at your side hustle? Fantastic, get back up, learn from the failure, apply lessons learned. Your side hustle will improve.
- Blew your monthly budget on an impulse buy? Reflect on your behaviors, identify what needs to change, and adopt new systems to prevent reoccurrence such as the seven-day rule.
What if I don’t fail? This is a very bad sign. It means you aren’t pushing hard enough. You should always experience small failures to facilitate learning.
Getting back up and starting over without learning is also an option. An option titled “insanity”.
Quitting is Also Hard
Selecting instant gratification today will result in future hardship. Guilt and shame will result in the future when you look back on decisions that wasted opportunity. Quitting may be easy today, but it comes at the cost of long-term pain. Lance Armstrong understood this.
“Pain is temporary, but quitting lasts forever” – Lance Armstrong.
Most of us are afraid of failure, and we should be. This fear drives us to perform well. The issue arises when we fail to take action because of our fears.
Enduring short-term hardship today provides long-term fulfillment in the future. Alternatively, we can take the easy option in the short term and endure the regret and shame in the long term.
Both options are hard.
Self-Discipline and Habits
Small habits add up to make huge differences in our net worth. Individual small habits may seem insignificant, but they accumulate over time to create huge effects.
“Habits are the compound interest of self-improvement” – James Clear, Atomic Habits.
How does this relate to discipline?
Examples: Habits and the Three Pillars of Wealth
Good expense habits include monthly expense auditing, the 7-day rule, avoiding consumer debt, awareness of subscriptions and budgeting.
Solid investing habits include dollar-cost averaging and sticking with asset allocation. Bad habits include the urge to gamble in the stock market and checking your portfolio every 15 minutes.
Good income habits include daily reading & self-educating, daily work on a side-hustle, and learning from failure. Fitness, nutrition, meditation, and good sleep habits keep your energy and discipline on point so that you can consistently solve hard problems.
Efficient Use of Self-Discipline
I don’t think it’s smart to rely on discipline alone. We need to make efficient use of our willpower to increase the likelihood of success. Implementing good systems and habits are what lead to success.
There is a growing body of research indicating that our reserves of willpower are limited, according to the American Psychological Association. This is the ego-depletion theory. The science here is not perfect, and it looks like more research is needed to account for the effects of “beliefs, moods, and attitudes” on willpower depletion.
The key takeaway is that we need to make efficient use of our reserves of self-discipline. I caution that this theory can be an easy leverage point for excuses. Watch out!
Be Strategic - Control Your Environment
The easiest way to delay gratification and improve habits is to engineer your environment. Avoiding tempting situations is far more effective than reliance on willpower alone. A disciplined person is often someone who simply avoids negative temptations.
If a box of cookies is on your counter staring at you, your willpower will eventually fail. Just keep the cookies out of the house in the first place. Don’t buy the cookies.
As I write this my phone is in another room two stories above me. This allows me to focus on writing these words. I am controlling my environment, otherwise, my willpower will fail me and I will become distracted.
Surround yourself with people who have the habits you want to emulate. Clean your home. Make it harder to watch TV. Sell the gaming console (intense).
Build Good Habits and Systems
Habits are beautiful. Once the habit is formed, the behavior becomes automatic.
You no longer need the same amount of discipline to perform the “good” behavior. This is great because now you can apply your self-discipline to improve habits in other areas, resulting in the habitual compound effect.
Forming Habits Requires Discipline
Forming good habits provides long-term gain at the cost of short-term discomfort.
It is uncomfortable to change habits. Present you doesn’t want change. However future you know habit change is for the best. It is present hardship for future gain. It is delayed gratification, self-discipline.
However, self-discipline isn’t the only thing required. We can also approach habit change strategically, to limit demand on our discipline. The book Atomic Habits by James Clear identifies methods to approach habit change.
How To Improve Self-Discipline
Do Something Hard Every Day (Habitual)
Treat self-discipline like a muscle that needs to be worked. I find the best way to do this is to do something hard every day. Self-discipline gets easier the more you apply it.
This is why work is valuable. It provides structure to our lives, along with many more benefits. I talk more about the problems with early retirement in this post.
Diet, Exercise and Sleep (Habitual)
Diet, exercise, and sleep provide you with the necessary energy, focus, and willpower to complete hard tasks.
Proper sleep improves willpower and emotional control throughout the day1. Add consistent exercise and solid nutrition, and your energy will skyrocket.
Like personal finance, diet exercise and sleep are simple. However, they are extremely hard to implement.
Meditation has been shown to improve attention and emotional control. I’ve directly observed these benefits over the last 1.5 years of practice.
It trains you to detach from impulsive thoughts that do not align with your long-term goals. So, it trains you to tame the short-term gratification desires of system one.
Self-discipline sets the foundation for the three pillars of wealth. Self-discipline is needed to delay gratification – the foundation to grow net worth.
The battle between present self and future self can go one of two ways: You can make sacrifices today for a much better future, or you can borrow from the future for a better today. Both are asymmetric. Minor hardship today results in huge benefits down the road due to compound growth. Conversely, living beyond your means today will generate large hardship down the road.
Opportunity cost and compound growth help us bring today’s money decisions into the future. We can also use opportunity cost to optimize the use of our time, energy, or any other finite resource.
Discipline is needed to take advantage of failure. We can use failure to improve, or we can quit. I showed that both options are hard, one is simply hard today rather than in the future.
Finally, it’s important to make efficient use of our self-discipline. Good habits are automatic behaviors that don’t feel “hard” after some time. We can practice discipline daily, and finally, we can develop good nutrition, fitness, and sleep to provide us with the willpower and energy needed for success.
I hope this helps you along your wealth-building journey