Your financial superpower: long-term thinking

We tend to spend money on things we can have right now – they seem more real than any long-term goals we want to save for. It’s easy to feel disconnected from our future because it just feels so far away. In fact, brain imaging shows that thinking about our future self activates the same brain regions as thinking about a total stranger!

If there was such a thing as a financial superpower, it would be the ability to resist immediate gratification by developing long-term financial thinking.

The good news is that this superpower is attainable – long-term thinking is like a muscle and can be strengthened by practice. How?

Meet your future self. Be nice! Make friends.

Take a selfie and use one of the many free apps that digitally age your face. Spend some time with this picture, imagining what your older self is doing and what they’re like. You can even have an imaginary chat with them about what their life is like.

Sounds silly, but it’s science! Researchers found that people exposed to images of their older selves started to save more and became more resistant to instant gratification – the need to have it now.

But the effect wears off – so you might need to regularly ‘spend time’ with your future self!

Before you spend, work out how much it costs per use

With a short-term perspective, we tend to idealise how our life with a new purchase will look. We focus on the joy we get from buying something – not so much how we’ll actually use it.

To change your thinking, think about a recent purchase, or one you’re thinking about making. How many times will you use the product? You can easily calculate the cost-per-use. Is it worth it?

This may seem like a lot of work, but for me it was a real game-changer – especially changing the way I shop for clothing. Let’s say I bought something for $80 that I’d wear 10 times. This would make the cost-per-wear $8. Would that be worth it? Or could I wear something I already have?

And don't forget all those other costs that come with it...

We often only see the price tag and don’t think about the extra costs of what we’re buying – such as maintenance, cleaning, servicing, storage, running costs and so on. Make sure to include those in your calculations too. Would it be cheaper to rent something when you need it rather than buy it?

For me, considering ‘cost-per-use’ led to an even bigger change – getting rid of our car. My partner and I lived without one for over a year in Auckland.

Having a car had looked like an absolute necessity, until I actually crunched the numbers and figured out how much it was costing. In our situation at that time, living within walking distance of our workplaces, it was cheaper per ride to take taxis when we needed to (like to the supermarket) than have our own car.

Every car is different, and the AA has this helpful guide on how to calculate the costs of owning and running a car. Their average is $21 per day for a small car. They assume there are borrowing costs involved, but even halving the cost to $10 a day, if you only use the car once a week for a relatively short trip, using a taxi or rideshare will be cheaper.

Think of what that money could do for you!

We often just think about the one-off cost of buying something, but when deciding whether to make a purchase, there’s another factor to consider. As well as the money that could be saved by not spending, there is also the ‘opportunity cost’.

The opportunity cost also includes the investment returns we could have if we invested the money instead of buying something (and what our future self could do with that extra money!).

Let’s say you typically spend $10 a week on something you could do without. Had you instead invested that money over a 10-year period, you’d have saved $5,200 and earned over $2,200 in returns on top of that (at 7% with no inflation adjustment). You can use our savings calculator to figure out how much your savings could add up to over the long term.

Now this isn’t to say you shouldn’t buy anything – after all, balance is important – but this exercise helps us think about our money and how it can grow in the long term.

Look for tiny changes that add up over decades

Another effect of focusing too much on the short-term is that we tend to not realise the effect of small changes adding up over time. I’m thinking about changes much smaller than giving up your daily coffee, because this is not about quick savings – this is about shifting your mindset.

For example, you could swap your lightbulbs for ones that use less energy, or explore which font uses the least ink when you print. Make it into a game: find the tiniest changes that may seem insignificant, then see how much they add up to over 10 years.

Why does this work? When you make changes like giving up something you buy regularly, you may save at first, but you could end up feeling deprived, which feels horrible and can eventually lead to overspending.

Tiny changes do not cause this psychological cost (and can even be fun). Instead, they train your brain to think about things in the long term. For example, see how saving 50c a day adds up over a year ($182.50) and then over 10 years ($1825), and then if that were invested ($2522, again at 7%).

This will shift your thinking over time – helping you apply that long-term thinking to more impactful decisions without much conscious effort.

Short-term thinking is a natural reaction to danger, which means that crises like COVID-19 make us more susceptible to limiting our time horizons. But if you can train yourself to think about the long term, your future self will thank you.

Celestyna Galicki is former Research Lead at Te Ara Ahunga Ora Retirement Commission, where she crunched data and kept across the research on how to be better with money.