Monday, November 18, 2019
The easy way to save money 6 powerful secrets from research
The easy way to save money 6 powerful secrets from research The easy way to save money 6 powerful secrets from research Weâd all like to have more money. (That stuff is really useful, ainât it?)Being worried about makinâ the bacon can end your marriage, skyrocket your blood pressure, and even cause your brain to malfunction.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:Money is the top reason for divorce and the number one cause of stress in Americans. People are demonstrably worse at all kinds of problem solving when they have money problems on their mind.Thing is, we all make dumb money mistakes, many of which weâre not even aware of. And a lot of those are due to quirks of human psychology.Luckily, Dan Ariely, a professor of behavioral economics at Duke University, has a new book out that explains some of the problems weâre prone to when it comes to moolah and what we can do about them. The book is Dollars and Sense: How We Misthink Money and How to Spend Smarter.Letâs look at some of what Dan has to say and see how we can save some shekelsâ¦1) âOn Sal eâ signs are the devilMore generally, Danâs advice is âignore relative comparisons.â Focus on what the thing costs, not how big a discount youâre getting.Saving 90% on a bus pass isnât a great deal if you never take the bus - but we make dumb purchases similar to that one all the time.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:It seems that discounts are a potion for stupidity. They simply dumb down our decision-making process. When an item is âon sale,â we act more quickly and with even less thought than if the product costs the same but is marked at a regular price.And weâre assaulted by these relative comparisons all the timeâ¦Youâd never have paid a few hundred dollars for heated seats - but when youâre shelling out tens of thousands of dollars for a car, that extra seems relatively cheap - and so you say, âAh, what the heck⦠Sure.â You should judge add-ons separately by their value, not by comparison.Similarly, payi ng percentages can be dangerous. Five percent might seem small but, again, that can be deceptive. Change the percentage into a dollar amount and objectively ask: âAm I comfortable paying this figure for this service?â(To learn more about the science of a successful life, check out my bestselling book here.)So companies use tricky comparisons and we often fall for it. But what problems with money do we completely create on our own?2) Itâs not a âbonus.â Money is money.Your paycheck goes toward bills and serious stuff. But that unexpected check you received in the mail? That money you won at the casino? That gift card aunt Phyllis sent you? Well, itâs okay to spend thatmoney on frivolous goodies because thatâs âdifferent.âNo, itâs not. Money is money.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:Every dollar is the same. It doesnât matter where money comes from⦠just because in our mind the money belongs to the âbonusesâ or âwi nningsâ account- we need to pause, think, and remind ourselves that itâs just money. Our money.Researchers refer to this as âemotional accounting.â Rationally, a dollar is a dollar. But as rationality-challenged humans, we feel the source of the money affects how we should use it. Bad idea.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:People are likely to spend something like their salary on âresponsibleâ things like paying bills, because it feels like âserious money.â On the other hand, money that feels fun- like $300 million in casino winnings- is likely to be spent on fun things, like more gambling.Studies show that when $200 is called a ârebateâ weâre inclined to deposit it in the bank. But when that $200 is called a âbonusâ weâre more likely to buy a treat.In fact, research shows people would prefer to receive money as a bonus versus additional salary for that very reason. It lets us feel like itâs okay to indulge instea d of save.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:â¦if we ask people how they would use a $12,000 lump sum versus an additional $1,000 a month, most say they would spend the lump sum on something special to make themselves happier. Thatâs because a lump sum payment would not arrive along with the usual monthly ebbs and flows of income and expenses- putting it outside of our regular account system. If, on the other hand, the money is received monthly, it would be categorized as salary- and most people would use it to pay normal expenses.Many people treat a tax refund as a âbonusâ that they can have fun with. Again, thatâs tricky emotional accounting. You didnât get a bonus; you gave the government an interest-free loan and theyâre returning the principal.How we get money often affects how we spend it. But it shouldnât. Money is money.(To learn the seven-step morning ritual that will make you happy all day, click here.)Okay, youâre getting rid of your arbitrary categories. But how do we actually spend less without having to use any willpower? Thatâs easy. Make spending painfulâ¦3) Use cash more oftenHanding someone cash hurts your brain. Seriously. Neuroscience research shows itâs indistinguishable from physical pain.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:The term âthe pain of payingâ was based on the feeling of displeasure and distress caused by spending, but more recently, studies using neuroimaging and MRIs have showed that paying indeed stimulates the same brain regions that are involved in processing physical pain.But we ever-resourceful humans have found a way (many ways, actually) to spend a lot and not feel that pain. The biggest culprit? Credit cards.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:Studies have found not only that people are more willing to pay when they use credit cards, but also that they make larger purchases, leave larger tips, are more likely to underestimate or forget how much they spent, and make spending decisions more quickly.Ever find yourself treating foreign currency like itâs Monopoly money? Ever abuse that Amazon one-click button? Anything that makes transactions simpler and quicker or blurs the process of handing over greenbacks reduces the pain of paying - and makes you more likely to spend.Writing checks doesnât cause the same amount of ouch that forking over cash does, but itâs still pretty good because having to write out âfive thousand dollarsâ will give you pause. But credit cards, gift cards, casino chips and nearly all online shopping is a financial opiate and dramatically reduces the pain that keeps your bank account flush.There is an exception worthy of mention here. The vast majority of the time, increasing the pain of paying is a great idea. But there are occasions where itâs worth it to be pain-free. You donât want to be saying âowwwwwâ repeatedly on your honeymoon or during other big milestones. You want to just enjoy the moment.So whip out the plastic and have fun. But make those occasions rare.(To learn the 3 secrets from neuroscience that will make you emotionally intelligent, click here.)So what one word pretty consistently results in dumb financial decisions?4) âFairâ is a four-letter wordItâs pouring outside so youâre going to get an Uber. But Uber is surge pricing. âThatâs unfair! Forget it. Iâll walk.âMaybe Uber is taking advantage of you. Maybe theyâre not. But the real question is: would you pay the surge price to not arrive home soaking wet? Probably. So youâre not punishing them. Youâre punishing yourself.âFair is a four-letter word.â Thatâs what my friend, Chris Voss, former lead international hostage negotiator for the FBI, likes to say. And Arielyâs research agrees.The concept of âfairâ messes with our heads and causes us to reject deals that still offer plenty of value.Fr om Dollars and Sense: How We Misthink Money and How to Spend Smarter:Letâs not get caught up in whether something is priced fairly; instead, consider what itâs worth to us. We shouldnât pass up great value- access to our home, a salvaged computer, getting a ride in winter weather- just to punish the provider for what we think is unfairness.The concept of âfairnessâ runs very deep in the human psyche. Nobody likes to feel exploited. And nobody wants to be known as someone who can be exploited.But most of the time it doesnât pay to get hung up on the concept of âfair.â Think about whether youâre getting reasonable value for the money youâre paying. Otherwise the person who gets punished will probably be you.(To learn an FBI hostage negotiatorâs tips for how to lower your bills, click here.)So far weâve avoided talking about the thing most lists of ways to save money talk about first: self-control. How do we boost it? Okay, letâs discuss epic poems and tim e travelâ¦5) Try a âUlysses contractâIn Homerâs âThe Odysseyâ, Ulysses tied himself to the mast of his ship to resist the Sirensâ song. (I just use the âblock numberâ feature on my iPhone, but whatever.)When youâre thinking about the future youâre pretty rational. But when youâre in the moment, face it: you can be an impulsive moron. So do something now that constrains your behavior later.Metaphorically, tie yourself to the mast of your ship with a Ulysses contract. (Or âOdyssesus contractâ if you prefer the Greek. Hey, Iâm open-minded.)From Dollars and Sense: How We Misthink Money and How to Spend Smarter:A Ulysses contract is any arrangement by which we create barriers against future temptation. We give ourselves no choice; we eliminate free will.You probably already use a financial Ulysses contract and donât even realize it - you call it a 401(k). You made the decision in advance to save for retirement and now your hands are tied.So go int o your online banking account and set up a recurring automatic transfer for every time you get a paycheck. When your salary gets deposited, X amount is immediately shuttled into savings. Research shows this will help you save - a lot.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:A study by Nava Ashraf, Dean Karlan, and Wesley Yin found that one group of participants who had their bank accounts restricted- that is, they chose to have money automatically deposited in a savings account- increased their savings by 81 percent within a year.And Ulysses contracts arenât just good for finances; they work for almost any future temptation. Hand your keys to a friend before you go drinking. Have a pal change your passwords on social media accounts when you absolutely need to focus.(To learn the six rituals from ancient wisdom that will make you happy, click here.)Whatâs another irrationality that screws up many financial decisions, from salary negotiation to buy ing socks?6) Drop anchorâAnchoringâ is a potentially devastating cognitive bias where the first number mentioned in a given scenario unconsciously influences your future choices.Well-designed menus often have a very high-priced item at the top. It doesnât make you more likely to buy the filet mignon but it does insidiously make everything else look like a bargain.Few people pay the manufacturer suggested retail price for a car. But that number is always big and visible when you look at the specs. Whether you realize it or not, itâs affecting the offer you end up making.So how do you resist an anchor? By having a different anchor in advance. Do your research and know what most people end up paying for that car and the MSRP will have less influence.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:This finding- that anchoring has a weaker effect when we have some rough idea of value versus when we have no idea- is important to keep in mind. When we st art with an established value and price range in our minds, itâs harder for outsiders to use anchors to influence our valuations.The most ironic version of anchoring is when we do it to ourselves - when your previous bad decisions influence your future choices.You have consistently overpaid for lattes and oil changes in the past so you mindlessly keep doing it. Stupidity as default.Look at your regular purchases and ask if they really make sense and whether there are cheaper alternatives. Personally, I have not updated my phone plan in two decades and am still paying $9 a minute for calls.(To learn the 4 rituals from neuroscience that will make you happy, click here.)Okay, weâre no longer money morons. Letâs round everything up and find out what happens when we all get richâ¦Sum upHereâs the easy way to save money: âOn Saleâ signs are the devil: âRelative comparisonsâ mess with your head. Focus on the end price, not how good a âdealâ it is. Itâs not a âbonus.â Money is money: How you got the cash should not affect how you spend it. Saying that âbonusâ money doesnât count feels good but being broke feels very very bad. Use cash more often: Make spending painful and youâll spend less. (Using cash is simpler than having a friend punch you in the face whenever you whip out your credit card.) âFairâ is a four-letter word: Focus on value. The plight of moral justice in the economic universe can wait until after the electrician gets your lights back on. Try a âUlysses Contractâ: Send me the deed to your house. If you donât have more money in your savings account two months from now, I keep the deed. See? Saving is easy. Drop Anchor: The only way to not be influenced by prices is to influence yourself ahead of time with other prices. Youâre going to be rich one day, right? Iâll roll with that. Youâre a future zillionaire. Cool.So then you wonât need to worry about these silly psychology quirks that affect your spending, right?Wrong.From Dollars and Sense: How We Misthink Money and How to Spend Smarter:About 16 percent of NFL players file for bankruptcy within twelve years of retirement, despite average career earnings of about $3.2 million. Some studies say the number of NFL players âunder financial stressâ is much higher- as high as 78 percent- within a few years of retirement. Similarly, about 60 percent of NBA basketball players are in financial trouble within five years of leaving the game. There are similar stories about lottery winners losing it all. Despite their big paydays, about 70 percent of lottery winners go broke within three years.The more you earn, the bigger your mistakes will be. So review the common problems your grey matter has with money and learn to make smarter choices. This w ay you can keep your millions.Money isnât the most important thing in life. But when you donât have to worry about moolah, itâs far easier to focus on what does matter most.Join more than 320,000 readers. Get a free weekly update via email here.Related posts:New Neuroscience Reveals 4 Rituals That Will Make You HappyNew Harvard Research Reveals A Fun Way To Be More SuccessfulHow To Get People To Like You: 7 Ways From An FBI Behavior Expert This article first appeared at Barking Up the Wrong Tree.
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