(Mental) Time is Money

Sharing the following from a Morningstar report. It’s a fascinating insight on how our perspective on time horizon directly motivates our savings rates. It may come as no surprise that the longer your mental time horizon when it comes to your finances, the more you’re likely to have saved. What’s even more compelling is the fact that this relationship still holds true regardless of your income level.

Bottom line – lengthening your perspective from immediate gratification to considering where you want to be financially 10+ years down the road leads to a more secure retirement.


By Sarah Newcomb, Ph.D.

What factors motivate better cash-management, debt-reduction, and savings behaviors? In a survey of several hundred U.S. residents, we found that a person’s perspective on time was far more influential than income, age, education, or gender when it came personal finances. Our results showed that people who think further into the future tend to save more frequently and build larger savings balances in retirement and nonretirement accounts.

Compared with those with time horizons of less than a year, people with full financial life plans had, on average, 20 times more money saved. Even looking ahead by just a few years increased savings fourfold. Regression analysis showed that the effect of time horizon on retirement savings was significant even when we controlled for age, income, gender, education, and the number of dependents, and the size of the standardized effect size was greater than that of the demographic variables. In other words, life circumstances matter some, but perspective matters more.

Our analyses showed time horizon had a significantly greater impact on economic behaviors than income. Yes, a person must have income that is adequate to their needs if they are going to be able to save. Our study suggests, however, that regardless of paycheck size, having a future-oriented mindset can make the difference between allowing expenses to crowd out one’s income or finding ways to save money.

Source: Morningstar

Source: Morningstar

As the graph below illustrates, in every income group, people who think further ahead (orange line) saved more than those with shorter time horizons (blue line). Again, it’s important to mention that the effect is significant when controlling for age, income, gender, and education levels.

Source: Morningstar

Source: Morningstar

Mental time horizon was correlated with more than just savings behavior; it had the same effect in reported cash and debt-management. This suggests that people who think ahead are more likely to keep track of spending, pay their bills on time, and carry low or zero balances on their credit cards. These effects also remained significant when controlling for demographic factors.

Clearly, (mental) time is money.

Final Thoughts

The difficult truth is that our brains are hard-wired to give more weight to immediate needs, and to discount the future. Some people naturally think further ahead than others, and our mental time horizon does tend to extend with age. Still, most people don’t think nearly far enough ahead to naturally motivate the kind of saving that will adequately prepare them for retirement.

The shorter a person’s mental time horizon, the more they will find long-term saving to be a challenging and painful task. The good news is we can train our thoughts and form new habits over time.

Source: When More Is Less: Rethinking Financial Health