I went shopping and saved $57.49!
Does the refrain sound familiar? Whether it's a coffee maker, boxed CD set, or a cute pair of shoes marked down to $22.50 from $79.99, it's easy to rationalize a purchase when the mind makes a sprightly leap from "spending" to "savings" mode. But no matter how fab those new mules are, there's $22.50 less in your wallet when you head for the store's exit.
Economists across the nation -- from Princeton University to MIT -- have made the case for a clear mind-wallet connection. They've found that we're not only irrational about money issues, we're predictably irrational. Everything from the way an expenditure is calculated, what currency we use to make a purchase, or how much we want to avoid a financial loss can cause us to disassociate with the actual dollars-and-cents decision and start treating our dough like it's Monopoly money.
Take public-television pledge drives, for instance. Public television stations have long relied on the fact that they can get higher pledges by calculating the per-day amount of a donation (and the free mug/umbrella/canvas bag with a logo). After all, 41 cents a day is pocket change compared to $150 a year. Same amount, different context. It works like a charm nearly every time.
Our irrational behavior depends not only on how we calculate our expenditure, but also what method we use to pay for it. Casinos use chips because the perceived losses seem less daunting to gamblers. After all, it's just 10 red plastic disks, right? Drachmas, yen, and Euros have the same effect. People spend more on items when they're shopping overseas because they don't rationally equate those pretty little coins with American currency.
The damage to our bottom line plays out fairly predictably in the stock market, too, where investors make decisions based more on emotional attachments than rational analysis. ("I just LOVE my Home Depot (NYSE: HD ) stock!") Studies show that investors systematically hold on to poorly performing stocks because they don't want to acknowledge a loss. On the other hand, many investors play it too safe because of an exaggerated perception of the stock market's risk. As a result, they put too much money in bonds and too little into stocks.
When you strip out the intricacies of personal finances, you're left with one simple fail-safe directive that will increase your net worth: Spend less money than you make and invest the difference.
Yeah, right. Too many of us are sidetracked by shoe sales and other financial divertissements. (Even the most well-adjusted investors fall victim to mind games -- even Warren Buffett's right-hand man. ) And that's OK, as long as you keep it in check.
Let's try a little reverse psychology:
- Fool Yourself Into Saving More
- Don't Flunk Your Retirement
- Are You a Homo Moronicus?
- Money = Happiness
- Drudgery! Tedium! Personal Finances!
If reading these don't help, there's always group therapy.
Dayana Yochim does not own any companies mentioned in this article, but she does admit that she "saves" a lot of money on shoes every year.