What is Threshold of Perception for Money?

Locus Pocus

If you have something happen to you, do you blame it on yourself, or blame it on external causes?

It’s an odd question, but an interesting one as it deals with your personal locus of control. But, that’s jumping ahead. Let’s start with defining a locus of control.

In psychology, the locus of control is a scale that defines a person’s beliefs about what causes good or bad results in their life.  For example, you might know someone who always blames themselves when things go wrong, or someone who credits only good or bad luck for what happens to them. People like these define either end of the spectrum on the locus of control. People who blame themselves for everything in their lives have an internal locus. People who blame higher powers, luck, or the environment for occurrences have an external locus of control.

Now, it’s worthwhile repeating that this is a scale, not an either-or proposition. People can display different characteristics of either locus for different issues. The big question we’ll ask here though is: What is your locus of control with money?

When you can’t run out of cash, is it because you had bad luck and needed to spend more than you had thought? Or is it because you forgot to plan ahead and have an emergency fund? Knowing your locus of control with regard to money can help you to plan in ways that work with your financial psychology as opposed to against it. And a plan that you can work with is a plan you’re more likely to follow.

Don’t let your psychological beliefs get in the way of you being financially successful. A good financial plan can help to protect you against both internally and externally caused problems.

Bargains and behavior

A recent post on Get Rich Slowly is ostensibly about how J.D. and his wife cleaned up his mom’s house and found that she was a packrat; but it’s really about how buying and hoarding “bargains” can be a trap. The house contained many unopened bulk packages of food that were long past their best-by date, newspapers from ten years ago, presents bought for five-year-old grandchildren who are now nine. As J.D. pointed out, a bargain isn’t a bargain if what you buy is wasted.

This post strikes home with me because my husband and I are working on the same issue. “My favorite chips are on sale!” I’ll say. “Let’s buy four!” We do, and instead of stockpiling them as I meant to, they’re gone within three weeks because I like those chips so much. “The bigger bag of ham is cheaper per ounce, let’s get that,” my husband says, but then half the bag goes bad before he eats it. We’re dealing with slightly different aspects of the same problem: we’re buying more than we normally would in the expectation that our future behavior will justify the purchase, but we don’t adjust our behavior accordingly. If there’s a tasty snack around, I’m inclined to eat it, not save it, even when I know I’ve had some recently. If my husband isn’t reminded that there’s food in the fridge, he tends to forget about it and eats other things that are more visible.

The key here is that it’s not our purchasing behavior that’s bad; it’s our behavior after the purchase that’s the problem. There are two solutions here: don’t buy the “bargains” when we know they won’t, in the end, be true bargains; or adjust our behavior to take full advantage of our purchases. I could put extra snacks in the rear of the pantry that’s harder to get to, to remind me that they’re meant to be rationed. My husband could freeze half his bags of lunchmeat, or I could remind him that he still has ham left. Behavior can be hard to change; whether or not a bargain at the store is worth it depends entirely on the person faced with the purchase. Is it worth it for you?

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.

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.

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.

Negotiating and Culture

Firstly, my thanks to Million Dollar Journey and their entry Confessions of a Car Salesman which discusses negotiating techniques used by used car salesman. Reading that blog got me thinking on the topic of negotiation.

Through my travels, I have often been fascinated by cultural attitudes towards negotiation.

In a number of places in the world, prices are flexible. They can be negotiated, bartered or otherwise influenced. Some individuals are raised in a culture of negotiation. They always try to talk their way to a different price.

Many of us in North America have been raised in a culture of price tags. What we see is what it costs. We look for sales and can try to maximize our value through those, but ultimately, we pay the listed price. Now, is this bad? Not necessarily. It means that in day-to-day life, you don’t have to worry about negotiating. However, in a few remaining areas of North American life, negotiating is common and almost required. These areas include buying cars, arranging salaries and asking for raises, and buying houses. Also, in a not so coincidental way, areas such as these are ones in which many of us feel uncomfortable.

Why do we have issues with negotiating? There are a multitude of reasons. First and foremost, for many of us it comes down to issues of appearances. If we negotiate, we can feel poor or vulnerable. I have had the privilege of witnessing master negotiators at work, and they let no sense of shame interfere in their bargaining process. They will claim poverty, starvation, the need to support a family and many other items as they push the price in the direction they want. Frankly, a good negotiation between two skilled parties is a fascinating spectacle. Not all negotiations are showy and loud though, everyone has a different style of negotiating that can work for them.

We need to look past the “price tag culture” in which many of us have been raised in order to see the benefits that lie in negotiating. A fraction of a percentage point lower interest rates for a mortgage can lead to savings of thousands of dollars over time. A few well placed words can cut hundreds or even thousands of dollars off of a car. Price tags make simple things like shopping trips to the grocery store faster and more convenient. However, by accepting prices on the larger ticket items, we often might be throwing our hard-earned money away.

So, look past any insecurities you might have on the topic, and examine the benefits you might receive from negotiating. Rather than sacrificing any self-esteem, you might end up thousands of dollars ahead for putting in a little time. As a good starting point, take a look at the entry on Million Dollar Journey, it can help you see just how easily we get sold up on prices, and how we can turn those tricks to our own use. Remember, sometimes you CAN look beyond the price tag.

Flattery Will Get You Everywhere

One of the most interesting facts about how products are sold, is that the products which can do you the most harm are often the most flattering to you in their ads.

Flattery used to belong to the domain of interpersonal relations.  You “buttered someone up” if you wanted something from them.  You flattered someone to influence a result in a positive direction.  Sadly, this tool has been adopted by the marketing industry.

We like being flattered.  Plain and simple, there’s no one who doesn’t like it, though they may be shy about receiving such flattery in public.  There’s a rush of recognition and pride in knowing that others share a good opinion of you.  How does this translate to marketing? 

Alcohol companies talk about exciting lifestyles, smoking was always for the adventurous and stylish, and our cars tragically live more exciting lives than we often do.  Credit card companies are the most entertaining with how they offer you a veritable Olympics of card recognition.  First gold cards, now platinum, then platinum plus.  You are given more and more recognition as they flatter you.  Pre-approved applications come with directions indicating that they will be handled with “special care” as the company is honored to offer you your due. 

Attending bars and drinking alcohol are marketed as part of adulthood, which makes them all the more attractive as soon as youth turn of legal age.  Credit cards, also viewed as a staple of adulthood, are offered in universities to youth eagerly trying to establish their adult identities.

Just as with flattering individuals, we need to look through at the motivations behind the flattery.  In the end, we truly are doing a favor to a company when we buy or use its product, but we do owe it to ourselves to make sure we receive the maximum benefit for the money we spend.  So look beyond the flattery, and see what the flattery is trying to hide.

Yoga for Financial Peace

Have trouble with controlling your shopping impulses?

As bizarre as it may sound, it just might be crazy enough to work. If we want to look at the background on it, we can compare financial health to physical health. Yoga has been cited as a beneficial action for weight loss and health maintenance. Not only does it help as an exercise, but through the movements of yoga you help to calm and focus your mind, promote inner contentment, reduce stress and anxiety, and promote a greater awareness.

Yoga is already being used as a contributing treatment for depression and anxiety (click here to be taken to an article from Psychology Today on the topic). As the very nature of this site suggests, how we handle our money is very much related to our state of mind. We can use shopping as a tool to feel better (such as retail therapy), we can avoid dealing with our financial situation (a cause of stress and anxiety for most people) which then compounds the situation further, or we can just not be aware of how the way we think can influence the way we spend money.

We are encouraged by the media to find the solution to our problems through “stuff”. However, if you can find that peace and satisfaction that we all crave WITHOUT spending your money, isn’t that a stronger position to be in?

Brent Kessel wrote an excellent article on this topic called “Can Yoga Make You Rich?” that was published on MSN Money (click here to be taken to the article). In it, he discusses how yoga can help you understand how you think, which is usually the first and most important step to regaining control of your finances. I highly recommend reading the article.

Depression and Finances: Can Money Buy Happiness?

 Can Money Buy Happiness?

 We’ve spoken a bit in this blog about how the brain can effect our financial decisions, but what about hour our financial health can effect our mental health?

Make Love, Not Debt bills itself as a Relationship Finance blog.  It’s a bold statement, but at the same time an interesting perspective to take.  Recently, the author has taken to speaking about depression, as he has been diagnosed with it.

 There were two posts that caught my eye on the topic.  The first “Depression is expensive, denial much more so.” deals with the idea that people often try to buy their way out of depression.  This touches upon what some of the other blog posts here have discussed.  The most telling post for me though was “Depression and Finances: Socioeconomic Status“. 

 What really jumped out at me from that post was this quote: “In one British study, actual poverty or unemployment increased the duration of any existing depression, but it did not appear to play any important causal role. Feelings of financial insecurity, however, both caused and prolonged depression. ”

Think on that for a second.  It really is an immensely freeing statement.  If you’re feeling depressed, and your feeling financially insecure, the two could be related!

So, to tackle the question that started this post, can money buy happiness?  No.  Not directly.  However, managing your money and eliminating feelings of financial insecurity seems to help eliminate depression, so I think that’s as good of a reason as any to get your finances in order.