Personal Finance Psychology

“I usually keep my card wrapped in a picture of my children to remind me of why I shouldn’t spend … ”
                                             — Trent of The Simple Dollar

If you think money is about dollar and cents and things you can hold in your house or your hand, you’re wrong. Personal finance may seem like it’s all about the numbers, where you have to spend less than you earn, where you have to save up an emergency fund, where you have to invest in the stock market and get your 10% return; but the truth of the matter is that personal finance is more about psychology than it is about mathematics. Everyone knows that you have to spend less than you earn, no one is so disconnected or so poorly educated that they don’t realize how basic math works. It’s like physical fitness, we all know what we’re supposed to do, we just have difficulty remember to do it.

Trent made the above quoted statement in response to my post about how you should write your goals on your credit cards. My tip was a simple reminder, his was a simple reminder packed with the power of psychology. You can easily write the goal on your credit card and then dismiss it when you need to spend. Dismissing a picture of your children, the reason you live, breathe, and work every single day… dismissing that would take a Herculean effort. But it works. Trent knows he shouldn’t splurge on food or kitchen tools or video games, JD knows he shouldn’t splurge on comic books, and I know I shouldn’t splurge on vacations. Slap a picture on it, of either your kids or your cats, and it drives that point home like a jackhammer.

If you think Dave Ramsey Is Bad At Math, you’re not alone. You’re also right. Dave Ramsey’s Snowball debt busting methodology is mathematically suboptimal. For those unfamiliar with it, you essentially pay off your smaller debt amounts first, then roll those payments into larger and larger debts. The payments “snowball” and you are also rewarded with positive feelings about knocking out the smaller debts. It’s suboptimal because you would save more money by paying off the highest interest rate debts first, but you lose the psychological benefit of kicking one of those debts in the butt. While suboptimal mathematically, for many it is the optimal solution because it helps them overcome their debt. It may not be smart math, but it’s smart psychology.

The next time you have difficulty with something personal finance, be it spending less than you earn or saving towards something, try some psychological tricks and you may find that it works out better in the long run.

 Frugal Living 

Reward Yourself for Frugal Behavior

Today, on my way into work, I was listening to some morning radio show talk about how 47% of British men give up six months of sex for a 50″ plasma television. It sounds ridiculous (that’s why they did the study in the first place!) but the interesting part is what followed. Approximately 25% would give up smoking and 25% would give up chocolate for the 50″ plasma television. That’s when one of the hosts said that if you gave up smoking for six months you could buy the television.

So why not reward yourself for frugal behavior? If you’re a smoker and you want a new 50″ plasma television, why not give yourself an added incentive to quit? If you smoke one pack a day at around $5/pack (my guesstimate), it would take 268 days to save up the $1,339.98 for a Samsung HPT5064 50″ Plasma HDTV. That’s a little under nine months at $5 a day. If cigarettes are more expensive in your area or if you’re a heavier smoker, you can save up even faster (and that’s not even taking into account all the positive health benefits you get!).

Don’t smoke? Don’t want a 50″ plasma television? Replace smoking with another dirty little secret habit (mocha lattes?) and replace a plasma television with something you’ve always wanted (trip to Europe?). Having a goal always helps you be frugal.

 Frugal Living 

Two Secrets To Saving Money (Hint: Instant Gratification!)

It’s been said that we Americans live in a world of instant gratification. We want the coolest gadgets and gizmos, the best food, the best cars, the best everything… right this very second. We are impulse, we are impatient, and most important of all, we are able to fund our impulsiveness and impatience with lots and lots of spending.

You know who else knows this? Stores. There’s a very good and profitable reason why there are tabloids and candy bars at the checkout aisles (one of the reasons why self-checkout kiosks haven’t become more ubiquitous is because you can’t sell someone high margin items like magazines and candy if they’re busy checking themselves out… plus the machines always break for some reason). Anywhere you go, you’ll likely see some small little item by the register like a trinket or a small votive candle or whatever. You’re impulsive and stores know it.

You know who else knows this? Salespeople. If you ever get a quote from someone to do work on your house, you’ll always get a special one day deal. You’ll always get an “awesome deal” that will only be good for the next three days. If you go into a store with salespeople, say furniture, you’ll always be offered six or twelve months of 0% financing if you buy today. One day offer!

Advertisers scare you by showing a burglar breaking into your home and then flashing a number for a security system company. They show you beer and snack commercials during football season and they show you pizza delivery commercials late in the evening. They know that they can take advantage of your need for instant gratification to bypass your normal decision making patterns. They’re smart… but you’re smarter.

Remove the allure of instant gratification and you can save yourself big money.

You don’t need that tabloid and your stomach doesn’t need that Three Musketeers bar. You shouldn’t take that contractor’s awesome one day deal because you can probably do better shopping around. Finally, furniture will always have 0% financing. Always. So, remove instant gratification from your life and you can save yourself money; here are two reasons why:

Shopping Around

If you resign yourself to always get at least three quotes on something before you buy it, you’ll save yourself money even if you do nothing else. While this seems obvious for things like high dollar contracting work where there are plenty of differentiated suppliers, it works even for commodity type things like DVDs and books. There are two reasons why this is effective:

  • You save money by finding the lowest cost among three similar vendors.
  • By not buying immediately and waiting to see the price in at least two other places, you may re-evaluate how badly you need that item or the work. You could decide it’s not what you want.

Is Time A Factor?

Sometimes time is a factor and you need to buy something immediately, such as airline tickets. However, if time is not a factor, consider waiting for the sales to come to you. There are plenty of bargain airline ticket places that will send you their latest fare sales, just wait for a good deal before pulling the trigger on tickets if there isn’t a specific event you’re going to. This same rule applies for items. has rotating deals on all classes of items, just wait until your item goes on sale before you buy it.

So, the next time you want to buy something, take a step back and try to find three alternative stores (or three alternative items that may be cheaper but serve the same function) and think if time is a factor. These two alone will save you a bunch of money you can better spend on a trip to Europe! (just wait for the deals!)

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