Dollars And Sense

Dollars And Sense explains why it’s so hard to manage money and teaches you how to combat false cues and natural desires so you can manage your dollars in better ways.

When it comes to spending money, we often fail to consider alternatives. As we’re buying something, we rarely stop to think about what else we could buy with that money. In economics, this is also called an “opportunity cost.” For example, when you’re buying a new car you should stop to consider the purchases you may be giving up when you buy it, like a nice vacation. Many people fail to do this when impulse buying, and it costs them later on.

Brain scans show that spending money triggers a pain response. Big companies know about and take advantage of by making it as painless as possible to make purchases. They increase the time between payment and consumption and give us points or SkyMiles for our purchase.

We also ease the pain ourselves. We like to use our credit cards to spend money we don’t have, with the intention of paying later. If you’ve ever read Dave Ramsey’s book, The Total Money Makeover, you know that this is generally a terrible idea if you want to build wealth.

Language plays a role in convincing us to spend as well. One study gave people two options: live with 20% less of your salary or live off of 80% of your current salary. People were far more comfortable with the latter, though the two options are exactly the same. Similarly, people tend to spend more money on products that have a fancy name. When words like “artisan” are used to describe bread, people perceive it to be worth more.

Studies show a whopping 26% of 50-64 year-olds have not saved anything for retirement. Saving over the long term is a huge problem for a lot of people. Why is this? Because it’s hard to connect with the distant future emotionally. The key to combating this is imagining our future selves doing wonderful things in retirement and thanking our past selves. As silly as it might sound, this exercise helps us emotionally connect with our future. Another tried-and-true strategy is to have automatic saving accounts such as a 401k so we essentially “hide” the money from ourselves. In the legendary story of the Greek hero Ulysses, to get past the deadly Sirens with their alluring music, Ulysses has his crew tie him to the mast of his ship. Similarly, a “Ulysses Contract” is a way we avoid negative temptations in our life by setting up a system or process that makes it impossible to fall into temptation. An example of this is…