Are you someone who drives an extra three miles to save a nickel on a can of turkey noodle soup, only to blow your budget the next day on a $70 throw pillow? If so, you're not alone. These days, people are making a lot of shortsighted decisions that can hurt their finances and health. A growing field called behavioral economics is uncovering why we act this way, and we’ve got the goods on how you can improve on it, free of charge. How’s that for a bargain?
Sacrifice smartly, not automatically. Sometimes when we try to pinch pennies, we end up making sacrifices that penalize us without providing much benefit. A recent example cited by several economists: turning into couch potatoes when gasoline prices spiked. In a nation obsessed with fuel costs, people didn't want to spend an extra $100 for a low-cost family visit or camping trip that could have renewed and refreshed them. Instead, they hung around the house, and in many cases spent at least that much on "staycation" activities such as movies and restaurants. Experts use the term "loss aversion" to describe this practice of scrimping in one area but not cutting expenses overall.
Get your priorities straight. It's a great idea to set budgets and control spending, but do so thoughtfully. Consider your priorities: If your gym membership keeps you fit and sane, cancel your cable TV instead. If you can't make yourself use your home exercise machine, have a yard sale and use the money for fitness activities you enjoy, such as biking or skating.
Beware of bargains. You know the type—they drive all over town hoping to "save" a few cents at the pump, clip coupons for products they dislike, and buy a five-gallon drum of nutmeg at a warehouse store because the cost per ounce is such a bargain. Perhaps you're even one of them.
It's in our nature to want a bargain, but before buying, ask yourself if it's a good deal for you. Something you don't need, can't use or don't really want is no bargain.
Be sure to know the difference between needs and desires. Recent sales figures show that purchases of luxury items, such as flat-screen TVs, plunged at electronics stores but jumped at discount stores, apparently because consumers wanted to believe that saving a few dollars meant it was okay to splurge on costly non-essentials during an economic meltdown. Be honest with yourself, and don't try to pass off your 82-inch TV or titanium cookware as "investments"—they are expenses.
Face the future. You've heard it over and over and over: You need to exercise, you need to eat better, you need to lose weight, you need to quit smoking, you need to stop wasting money. You know you should. You know you could. You know you will—tomorrow. Think of all the money you'll save. Think of how much better you'll feel. Yet every tomorrow becomes just another today.
Why do we keep doing this to ourselves? Because there's no time like the present, or so the brain is wired to think. People often behave irrationally because they devalue the future. For instance, most workers who are passively offered thousands of dollars a year in matching 401(k) contributions from their employer will turn it down; they'd rather dispose of their "disposable income" on the latest fashions or hot new restaurant. However, when required to make active decisions on their retirement plans, most employees do take advantage of the free money, Harvard University behavioral economist David Laibson has found. When living in the “now,” it makes sense to make pre-commitments, because the next stage of “now” is closer than you think.
Weigh information individually. You know the routine: You go in for an oil change. As usual, the mechanic/salesman tries to upsell you to a more expensive procedure. You politely decline; all you want here is to use your oil-change coupon. Then one day he warns that your differential fluid must be changed. You figure it's another scam, say you'll think about it and ignore him. Terrible and terribly expensive things happen to your engine.
You may have had similar experiences with a plumber, electrician, computer technician, dentist, doctor, investment adviser or real estate agent. The lesson to learn: It's up to you to consider the merits of each piece of information you receive. An occasional liar isn't necessarily a constant liar.
You can simplify things by dealing with honest, reliable professionals. They do exist, and you can find them by seeking recommendations from people you know, consulting the Better Business Bureau and doing Web searches. These businesses might not offer coupons, but you'll save money and peace of mind in the long run.
So the next time you stop and admire that $70 throw pillow on your way back from picking up turkey noodle soup, stop and think. That’s all it takes to stop your money from making you crazy.
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