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Money in marriage

This is a post that discusses this post about a man who finds out that his wife has been hiding credit cards from him while he’s been working to pay off their debt. It’s an interesting story, but what really got my attention was the comments.

The post describes a husband dealing with his wife’s duplicity in finance. Many of the commenters were also men who wrote about their wives who hid their spending, were heedless overspenders, or were generally deceitful. There were also several women saying “It’s not just women who are bad at money, my husband’s the spender and I’m the saver…” and many comments to the tune of “Of course this happened, women are all bad with money and love to overspend, don’t marry them or you’ll be wasting your time and hard-earned cash.”

Being a female saver, I don’t like the tone that these men took. I wouldn’t like it even if I were a spendthrift, because they were stereotyping women, using their own experiences and the “stereotypes become stereotypes because they’re generally true” excuse for calling all women bad at finances.

This is, flatly, not true. Yes, there are certainly women who are terrible spendthrifts, either intentionally or accidentally, because they love it or to make up for some other psychological lack. There are men who are the same way. There are women and men who are masterful with their finances. A handful of people’s experiences doesn’t prove anything. The plural of anecdote is not data.

There’s truth in the idea that women are less knowledgeable about and less responsible for their money on average, absolutely. This is because our society is still growing out of the societal norm wherein men earned money and were expected to handle it, while women got allowances and weren’t expected to know anything about finance. That’s changed, fairly recently and perhaps too suddenly for some; there are women out there who know nothing about money because they haven’t been taught and haven’t been expected to learn, but suddenly they have access to $20,000 in credit and no real idea of what that means.

But you can always find an example of whatever stereotype you prefer to hold. The bigger truth is that it’s not women who are bad at money or men who are bad at money; some people are bad at money. And if you’re married to one of those, it’s important to understand that and be able to work with him or her to figure out your finances together. And it’s vital not to assume that your wife is a compulsive spender because she’s female, just as it’s important not to assume your husband can fix your car because he’s male.

There’s some interesting information here on how marriage and money interact (including a poll that says, among other things, that husbands tended to underestimate “how much women care about almost every financial issue”). But possibly the more important thing you need to know about money and marriage is the simplest: that your marriage and your money need to be dealt with in the unique way you and your partner decide on, not based on other people’s stereotypes and outmoded cultural ideas.

Tax Returns and Found Money

We have an odd attitude towards tax returns and pretty much any money we get from the government. As this money falls outside the limits of our regular salary, it usually hasn’t been allotted to pay any particular bills, and isn’t needed for day-to-day expenses. So, what do we do with it? We spend it with the same attitude we would towards a lottery win.

Why?

Let’s dissect this choice into a few important points.

Where does a tax return come from? While it seems like a large lump sum, a tax return is actually a return of money that you overpaid to the government. It means that the government got a hold of your money and held it for months until you filed a return to get it back. This money isn’t found, it was yours to begin with.

Why do we blow the money? Not all of us do, but the problem with tax returns is that they are the gateway to spending more. Perhaps you use your tax return for a vacation, but then need to pay for extra airport taxes and fuel fees from your regular money. Or perhaps the tax return is a payment towards a home renovation, but you need to pay the balance of the amount yourself.

What is our best use of that money? Since a tax return is viewed as “found money”, many people don’t put much thought into how they can spend it to best benefit themselves. While a vacation can be the most benefit, maybe saving the money so that you can replace an aging car when the time comes, or using the money to pay down debt is better. Just because you receive money you weren’t counting on doesn’t mean you shouldn’t maximize the value you get for it.

So, whether it is a tax return or some other type of found money, you need to think carefully on what you do with it. Don’t get caught up in the giddiness of having extra money, instead, treat it like any other paycheck and use it in whichever way benefits you the most.

Retirement and Other Concepts and Traditions

I’m a great fan of The Div-Net, a blog on dividend and value investing. Not being as knowledgeable about the topic as I want to be, I find the posts there to be quite educational.

However, in a recent post titled “How much money do you really need to achieve financial independence?” I found something to which I objected. Who gets to define financial independence?

It seems silly, but there are a number of concepts we take for granted. Retirement is one of them. We’ve been sold a concept of retirement. It’s not an entirely objectionable one, but it does ignore some factors.

Retirement for most people is an end to work. A chance to get out of the rat race. However, this concept ignores several important facts.

1. Some people like work: it might seem crazy, but often times people don’t mind their jobs, or even might like them. Work provides a reason to get out and socialize with others. It gives you a feeling of achievement, and lets you spend the hours of your day in a way that lets you feel reasonably content.

2. Work makes money: Saving for retirement can be a challenge. Working into your retirement can help make that challenge less stressful.

3. Work comes with benefits: Insurance, sick leave, and everything else can cost quite a bit. If you have a workplace that can provide them, this can aid your retirement plan immensely.

Really, the only mandatory thing is that you must plan for your retirement, and planning for your retirement includes defining exactly what you want your retirement to be. Will it be working full-time, part-time or not at all? Will you start your own business or travel the world? These are the decisions that define your personal financial independence, and everything else must follow them.

As a society, these concepts are framed and taught to younger generations. We are taught that diamond rings are necessary for engagements, that weddings need to be catered and that retirement needs to be without working. These traditions benefit the companies that fulfill them more than they benefit you. If you do something, do it because it means something to you, not because a commercial told you to retire at a certain age.

Question these conceptions. You might be looked at a little oddly by people all around you, but it is far better to plan your finances around things that are meaningful to you, rather than just another method of “keeping up with the Jones”.

Good news never lasts

A recent WiseBread post discusses how people’s standards of living tended to rise linearly before the advent of credit cards, and how they don’t necessarily now because credit-card holders can borrow money against their future to raise their standards of living in the present. The author, Philip Brewer, discusses being deliberate about raising one’s standard of living and raises some good points on when to buy things to make you happier and when to say “I have enough.”

He mentions that it’s important to be happy with a stable standard of living, because “we know that people are made temporarily happier by increases in their standard of living,” but that those increase don’t happen often enough to rely on. He’s right; it’s a well-known phenomenon that people adjust to new situations remarkably quickly–and it’s easier to adjust to good news than bad.

Why is this? Basically, it’s because it’s important for us–for any organism, really–to be able to understand our world. That means that it has to be familiar; novelty by definition is strange, and strangeness is something the brain doesn’t like. So it analyzes the situation, accepts it, encodes it as the new normal, and gets on with its other tasks. There are neurons in the brain that respond specifically to novelty. There’s also a big section of the brain, the prefrontal cortex, that carries out what are called executive functions: synthesizing, organizing, understanding.

So it’s a physiological fact of life that sudden good news isn’t always going to be as thrilling as it is the day you get it; that feeling may last a day or even a few, but eventually your brain will incorporate the news into its idea of how the world should be, ought to be, and will settle down. Philip’s advice on considering ways to increase standard of living long-term, not just temporarily, is good to follow, because those temporary increases will inevitably go away.

The Price of Immediate Gratification

We live in a now world. We’re not taught to delay satisfaction of our wants and desires, but why is it so important to own something new at the first moment possible?

Marketing.

If you look at marketing, there are curves of acceptance. Early Adopters is the term for people who pick up something early on. They help to pave the way for the masses that will follow. When you combine that curve with the concept of economies of scale, you realize that as more people buy the product, the price invariably becomes cheaper. Prices will also drop once initial demand is supplied.

A great example of this is with DVDs. When a new DVD goes on sale, the cost is usually much higher than it will be a month later. Yet, people still go to buy DVDs when they are first released. Why?

Delaying gratification isn’t as hard of a concept as it seems. Yes, you deny yourself something you want for a time, but that’s getting easier as time goes on anyway. It used to be that you would need to stay up late to watch TV shows, or miss out on something else. Then VCRs came along. Now we have PVRs and DVD recorders which are even more efficient. Instead of losing sleep, these appliances help you take something you want and move it to a time where it benefits you more. When you look at the bigger picture, isn’t that similar to waiting a month to get half off the price of your DVD?

While being an early adopter can be fun, it’s an expensive place to be in. You will pay more for goods and services that generally aren’t as good, as the bugs get worked out by the first users.

Delayed gratification means you experience all of the same things, but by doing so later, you save yourself time. So, while immediate gratification can be a good feeling, is it worth the cost to you?

Keeping up with the Jones…. In Reverse

We know that humans are a competitive species. In this blog, my fellow writers have brought up the concept of “status” and its perils.

So, we know it exists. The question we have to ask ourselves is how we can use this to our advantage.

Can we? It seems a big stretch, but perhaps we can be just as competitive about getting our finances in order as we were about messing our finances. Well, there is a school of thought on that. It’s called Debt Club.

If you’re thinking of the rules of Fight Club, I did that too when I first heard of the concept, but it’s quite different. While the rational and reasoning behind it can be explained in a number of different ways, social competition is essentially a cooperative effort for us to ruin ourselves. If we can work together to get in trouble, we should be equally capable of working together to get out of it.

I find the concept of debt club to be a fantastic one. Yes, there is a cooperative aspect, but as I mentioned earlier, this does allow you to tap into that competitive nature and use it for good purposes.

Remember, when we talk about how our brain works in this blog, we want you to be able to use that information to your advantage. Sometimes, your brain and your way of thinking can be an obstacle to financial security, so you need to figure out how to use how you think to your advantage.

Letting fear act on you

“Should we buy more angelfood cake mix?” I wondered as my husband and I walked down the aisles of our local Kroger. “It’s only up twenty cents.”

“I’m not buying beef jerky,” my husband said several aisles later. “I can’t stomach paying that much for that little.”

“Eggs are almost as bad as back in Seattle,” I noted further down the store.

“We’ll never again see 4-for-$10 deals on pop,” he predicted, not stopping in that aisle.

“Floss is cheap; I’m going to get two,” I said. Then realized that floss wasn’t food and, unlike everything else in the store, its price probably wasn’t going up.

Psychological studies have found that fear works as a motivator–but only when the fear is accompanied by a message on how to avoid danger. Take global climate change, for example. People who realize that it’s a real problem and may in fact lead to disaster down the road are generally panicked and depressed, because there aren’t any clear messages yet on how to fix things. (We’re getting there, though, slowly.)

In the current economy, people who are afraid of rising prices but can’t think of anything to do about them are likely to be paralyzed, afraid but unable to act. People who can think of things to do–use coupons, buy store brands, skip luxury items–are very likely to do them, and by doing do, mitigating their fears.

Fear can be a very useful persuasive tool. Letting it work on you can achieve big changes–just make sure they’re ones that are good for you, not good for the ones using the fear as a message.

The Psychology of Budgeting

I confess, I am an optimist.

Not a wide eyed and naïve one, rather I am a cautious optimist who tries to plan ahead for things. Sadly, my optimism does someone lead me to underestimate things.

A recent study from the University of Southern California called “Will I Spend More in 12 Months or a Year? The Effect of Ease of Estimation and Confidence on Budget Estimates.” suggests I am not alone in letting optimism lead me to underestimate things, at least in the short term. The research indicated that consumers had a tendency to be over-confident when making estimates for short-term budgets. However, when making long-term budgets, consumers tended to be much more cautious in their estimates, as they acknowledge the greater potential for unexpected surprises.

The study does concede that monthly budgets function quite well for relatively predictable monthly bills, but when it comes to estimating more open-ended costs, our optimism can be our enemy.

Lead researcher Gülden Ülküman says, ‘When budgeting, it seems to be wiser to assume that one’s knowledge is unreliable.’ What are the applications of this? Well, as a starting point, you might see budgeting software asking you questions to make you question your assumptions and feel less confident about the estimates you make when compiling a budget. How can you make use of this knowledge? Well, to start with, let your inner pessimist come out and play when compiling a budget. We’re often taught that a negative attitude can cause us problems later on, but it appears that in this instance, pessimism is the winning strategy. As an optimist, I hate to concede them the point, but it’s hard to argue with science, especially when it matches what I have seen in the real world so very well.

5 Ways we Lie to Ourselves about Money

We’ve talked about the different ways that our brains and the way we think can work against us when it comes to money, but what about how we outright lie to ourselves?

Yes, in many ways, we’re the victim of our own lies when it comes to money. But generally, even if we trick ourselves into thinking our financial situation is stable and in order, we still can’t escape the fear that comes from being financially unstable.

Let’s look at some of the ways we lie to ourselves.

1. Looking at an incomplete picture: This has become easier with time. We have accounts with one bank, credit cards with another, a mortgage with yet another again. By shopping around, we get ourselves the best rates and can save ourselves money, but we also make it more challenging to get a complete financial picture. As anyone skilled in the art of lying will tell you, the key to a good lie is to make it as true as possible. So, we look at the good side of things. We might have 4 credit cards with which we’re doing GREAT, but it only really takes one bad one to make it a lie.

2. Spending money before we make it: With easy credit, overdrafts, payday loans and other services, this is easier than ever. But, when you spend money before you make it, you get ahead of your income.

3. Not planning for the future: Surprises happen. We can all hope for beautiful weather and cloudless days, but into every life, a little rain must fall. Clothes wear out, cars break down and houses need fixing. These are facts of life, neglect them at your peril. If you don’t plan for expenses in the future, you risk not having the available funds to meet these expenses.

4. Not knowing where our money goes: It might seem like a small thing, but when you start getting unpleasantly surprised by your bank balance, you are on the road to trouble. Not knowing what you have means you might spend more than you can afford, which is where a lot of people start down the road to trouble.

5. Not looking at the big picture: This is a broad statement, but it is true in many senses. You might save money buying larger sized products in bulk, but they could also spoil before you use them all. You might fall in love with fruit that’s on sale when it is in season locally, but buy it when it’s imported from across the world and costs accordingly. You could get a job that pays you $5,000/year more, but then spend $10,000 extra on gas, insurance and car maintenance because the commute is twice as far. Look at the whole picture. It’s complicated, but it’s also the only way to truly understand money.

Nobody likes a liar. Lies, even little white lies, often cause far more trouble than they save, and they can delay you from attacking problems while they are small and easily solved. Look at your small habits and how you think of money. Are you lying to yourself?

Sunk costs don’t have to sink you

It’s finishing the $3 brownie that turned out to taste like chalk. It’s going to a Mahler concert, even though you hate Mahler, because you had season tickets to the symphony. It’s proposing to your girlfriend, even though you’re not sure you want to, because you’ve been together so long. It’s the sunk-cost fallacy, and chances are, you’ve been a victim of it.

The sunk-cost fallacy is the tendency of people to make decisions based on past costs and benefits rather than future ones. You’ve probably heard of throwing good money after bad: you’ve already put in this much time/money/whatever, and you don’t want to waste it, so you stay in a situation even though you’re not going to get anything out of it. Rationally, this doesn’t make a lot of sense; why put yourself into a situation that will yield nothing instead of making a better choice?

This recent study suggests that we do it more when we’re young. Strough, Mehta, McFall, and Schuller (Psychological Science, July 2008) asked young adults and senior citizens to evaluate how long they would watch a bad movie. Young adults said they would spend more time watching when the movie was one they had paid for, but the older adults chose to watch about the same length of time whether they had paid for it or not.

Strough et al. suggest that this is because older adults are more likely to look at positive aspects of situations, while younger adults pay more attention to negative aspects and therefore try to make up for their “lost investment.”

This argument may or may not hold water–personally, I find myself less likely to spend time doing any uncongenial activity as I get older–but the result is the same, no matter the reason: older adults are less likely to trap themselves in bad situations than younger ones.

This doesn’t mean that all we can do is wait to grow older. Larrick, Morgan, and Nisbett (Psychological Science, 1990) called the principle that we should be obeying–considering only future costs and benefits, not past actions, when making decisions–the sunk cost principle. They found that college students could easily be taught to apply this principle–a one-month checkup after a short training session found the students using it successfully. Essentially, the key is to treat whatever you’ve paid for–a movie ticket, a stock, a relationship–as if you hadn’t paid for it. Would you still want to keep it if it had been handed to you free that morning? If not, then it doesn’t make economic sense to spend any more money or time on it. We, too, can avoid sitting in the rain to watch baseball and keeping money in bad funds when all that’s motivating us is regret over a past investment that’s already irrevocably lost. Sometimes all it takes is a little knowledge.

Emotion can be the enemy

Apparently, movies are the next to go in airlines’ attempts to make up for rising fuel prices. US Airways will be removing movie service on its flights November 1, and expects to save some $10,000,000 a year by doing so. They have also decided to start charging for beverages. And, of course, they were among the first–though not the only–to institute charges for checked luggage.

My husband and I just got back from a trip from Toledo to Seattle. On the way back, we discussed the merits of driving instead. His family lives in Toledo, mine in Seattle, and the distance is about 2400 miles. Driving would take about three days. (It’s possible to do it in two, but only in good weather without much sleep.) It would be more comfortable and flexible, but more troublesome and expensive: three days’ travel instead of six hours, needing at least one of us to be alert for all that driving, paying for hotels and food and gas.

Until the recent announcements, we never seriously thought about driving instead of flying. But now we are. What changed? The ticket price and the smaller seats and the luggage charges, yes; but mainly, it’s the beverages. Currently, beverages aren’t allowed through security lines unless they’re less than 3 oz. Once drinks are no longer free, our options are to buy from the airport, to buy from the airplane, to go thirsty for five hours in the arid plane air, or finagle a drink–bring an empty bottle and fill it with tap water in the airport bathrooms, for example.

This is not a big grievance. So I have to carry a bottle with me, or pony up two dollars for a drink. Is that really worth the enormous hassle of spending three days in the car, paying for two hotel stays and some 75 gallons of gas each way?

Logically, no. But logic and money don’t necessarily have a lot to do with each other. Here, what’s pushing us to think about avoiding the airlines is resentment: that we’re losing privileges we had before, through no fault of our own, and paying the same amount (or more) money for the experience. We feel cheated. We feel annoyed. We don’t want to deal with the entity that’s depriving us of what we had. But financially speaking, putting up with the loss of privileges is worth it. Two round-trip plane tickets cost about $800; driving the same distance costs about $600 each way. Plus there’s the matter of those extra two days of traveling. Four days and $400 is worth the hassle once we stopped to work it out; but the cost of going with our emotions wasn’t readily apparent until we did.

This balance–between money and emotion, logic and comfort–is present in most financial decisions you make. It’s less evident in most, but your emotions color most of what you do. Emotions were evolved as mechanisms for enhancing our survival, but evolution hasn’t caught up to Wall Street yet. Emotion is a continual opponent in our struggle to do our best for ourselves financially. There’s no real cure for it; all you can do is be aware that your emotional self is not necessarily your best self to consult on money matters. This is not to say that happiness and comfort aren’t worth paying for; they are. Sometimes. The key is in deciding how much they’re worth in each situation and acknowledging that that’s exactly what you’re paying for.

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