Key Messages
Why We’re Bad At Managing Money: A Look At Human Flaws And Unusual Concepts
Do you ever find yourself struggling to save money? Do you end up making irrational decisions when it comes to your finances, despite wanting to make the right decisions?
If so, you’re not alone – most of us humans tend to be pretty bad at managing our cash.
In Dollars and Sense, readers will discover some of the reasons why we’re so lousy at spending our money wisely and setting aside funds for the future.
A lot of it has to do with fundamental human characteristics (which are hard to avoid) as well as human perceptions of money itself.
So don’t beat yourself up too much if you find that your financial habits aren’t the best – it’s something that almost every person struggles with.
To help improve your practices around money, readers can explore topics such as JCPenney going outside their price range in order a result in a higher profit, or what Ulysses contracts are and how they could potentially help an individual save more than they have been.
The Lure Of Value Cues: How We Make Unwise Spending Decisions
Money is an abstract concept and its value will constantly fluctuate.
In order to efficiently manage our money, we need to understand the importance of considering alternatives and of not relying on external cues to determine the value of something.
Irrational spending happens when we don’t consider all our options or the opportunity costs, which could include taking trips, treating ourselves to expensive restaurants or other forms of luxury.
Alternatively, it could mean saving our money for a rainy day.
Unfortunately, one of the biggest mistakes that people make when it comes to their finances is not factoring in opportunity costs when planning their purchases.
Even if they do stop and think about their choices, they may simply not understand what other things they are giving up by purchasing one item over another.
Companies further exploit this by offering deceptive “special offers” and making use of persuasive language such as “limited-time only” or “spectacular opportunity“.
This tricks us into thinking something has more value than it actually does, leading us to make irrational decisions that we wouldn’t have made if we had been aware of the true cost.
We Look For Cues To Determine Value And Stop Eating, Even If We Are Not Really Hungry
When we make decisions, it is difficult to determine value simply by looking.
We use shortcuts by comparing similar items, but this can often be misleading.
Take the case of JCPenney in 2012, the prices were marked up high and then discounted with coupons, creating a false sense of value for consumers.
Ron Johnson took over as CEO and realized that customers needed fair and honest prices.
But when he got rid of all the discounts and lowered prices to their actual retail value, customers didn’t like it and the store lost $985 million in just one year.
This goes to show that value cues are important for us because they make us feel like we’re getting a good deal, even though we may not actually be doing so.
But oftentimes, these cues aren’t necessary — we are perfectly capable of deceiving ourselves when it comes to recognizing or making decisions about value.
In an experiment done by Brian Wansink in his book Mindless Eating , some participants were asked to eat until they were no longer hungry from a bowl with soups attached secretly refilling itself While some stopped eating after a certain amount was reached, others kept on eating until there was no food left in the Bowl before deciding that they were full – showing that without any visual cues of stopping (empty bowl), people could easily go overboard trying to satisfy their hunger.
This serves as an example that with or without external cues such as sales or discounts, sometimes our own mental cues could lead us astray as far as determining or recognizing how much ‘value’ something has — an issue particularly pertinent when it comes to decision making or judgements regarding items in general.
Weighing Up Life Choices With Mental And Emotional Accounting
When it comes to spending money, mental and emotional accounting play an important role in our decision-making process.
We assign subjective values to different categories of expenses and use those values to weigh up our options.
For instance, if you lost a $100 bill on the way out the door to buy a concert ticket worth $100, you may consider buying a new ticket differently than if you’d already bought the ticket and then lost it.
Despite them costing the same amount, even a rational mind wouldn’t treat this scenario with objectivity as there are so many options for how to spend that money.
That’s why mental accounting can be useful as a time-saving tool.
However, mental accounting isn’t perfect either – often people allow their emotions to override their financial decisions.
When we attach feelings to our money, it can sway our behavior when making purchases or donating funds.
For example, if you got some money from someone you don’t like and want to get rid of those negative feelings quickly, donating it can seem like a sensible move but then spend what’s left behind without thinking about how best it could be used.
Ultimately, we need to remember that both irrational forms of mental and emotional accounting have their downfalls when making decisions with our hard-earned money – so we should take extra caution not let them influence our actions too much!
The Power Of Language And Rituals In Enhancing Our Consumption Experiences
It’s amazing how the language we use and the rituals we create can significantly change our perception of value.
Take, for example, a study from 1988 in the Journal of Consumer Research which showed that we’re far less comfortable with spending retirement on 20 percent less of our income rather than 80 percent of it- even though both sums are technically equivalent!
There is also evidence that language used to describe products or services can give us the impression that they are worth more.
In restaurants, words like “complex and earthy” can make a bottle of wine seem like it cost $80 when really it costs $30 at the grocery store.
This phenomenon is known as consumption vocabulary and it’s linked in our minds to superior value.
Additionally, creating rituals around consumption adds greater perceived value too.
In 2013, researchers from University of Minnesota and Harvard Business School asked participants to either quickly eat a chocolate bar or slowly unwrap and break it into pieces before eating – those who took extra time were willing to pay more for the chocolate!
Through this process, objects related to consumption are seen as having greater value.
So there you have it – language and rituals play an essential role in shaping how we perceive value.
We should never underestimate the power of words and action when dealing with business transactions!
How To Improve Financial Self-Control: Connect With Your Future Self And Set Ulysses Contracts
When it comes to saving and budgeting, having self control is key – otherwise you’re just putting your money in the wrong places.
UCLA’s Hal Hershfield suggests creating an emotional connection with your future self to help resist that temptation.
You can also imagine “future-you” appreciating the benefits of your good decisions or stepping into retirement without a worry in sight.
It can also be helpful to think in terms of fixed dates or set up what are called Ulysses contracts, where you eliminate some options so you don’t have a bad decision as an option in the first place.
For example, if you’re dealing with credit cards, use only prepaid debit cards or automate your savings by setting up deposits from each paycheck so that it’s taken before you even get the chance to spend it on something else.
Studies have shown that those who set up automated savings ended up saving 81 percent more after 12 months!
All of these strategies are designed to help boost your self-control and resist or remove any temptation to spend money imprudently.
By understanding why we make bad financial decisions, we can start implementing techniques that will enable us to become more savvy with our finances and plan for our long-term financial security.
Wrap Up
The final summary of Dollars and Sense is this: in order to take control of our finances, we need to understand human nature and the way it dictates our spending decisions.
Rather than fighting against instincts, it’s best to set up systems that keep us away from our worst impulses.
One example for doing so is replacing complex budgets with simplified versions, where each week you can put a predefined amount on a prepaid debit card as your discretionary budget.
By setting up such boundaries and automated tools, it’s easier to stay on track and make better money decisions.
