3.1 The preference for bringing forward financial rewards and for delaying outlays
Suppose you are given a choice to receive £200 today or £200 after four months. What would you choose? It is safe to predict that you will choose £200 today. It is a normal human behaviour to prefer to receive a reward earlier than the same reward later. You can explain this preference in two ways.
First, if you have £200 today, then you can spend it on something that you like. Second, you can put the £200 in an account that pays interest. Although interest rates are low at the moment, you will definitely have more than £200 after four months.
But what if the choice is between £200 today and £400 after four months? Now it is not easy to make a prediction. For most people, it would be unreasonable to forgo £400 in four months in order to get only half the amount (i.e. £200) today. However, many people may prefer £200 today rather than £400 in four months. The important thing to note is that such a clear preference to receive reward early and forgo a much larger reward in the future may lead to bad spending decisions.
Another important point to note is that sometimes people prefer to delay payments for products and services they purchase. For example, some people pay for car insurance in monthly instalments over a year rather than in full at the point of purchase. If you pay in instalments over a year you are entering into a loan arrangement with the insurance provider. Given that the interest rate charged is commonly very high, choosing to pay in this way is usually a poor financial decision.