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Discretionary spending and financial illusions

Happy (late) Independence Day to our fellow American readers. I celebrated mine quietly by visiting my parents for a small barbecue (plus angelfood cake and home-grown strawberries). Once it got dark, we walked along the street to watch fireworks.

My parents live in a well-to-do neighborhood on the side of a hill. As a result, we were able to see dozens of fireworks at a time, both from neighbors down the street and from the residential areas in the valley below. It was beautiful. “Think how many thousands of dollars are going up in smoke and pretty lights,” my husband said.

This annoyed me quite a bit, because instantly I did, and the fireworks became so much wasted money, the red and green bursts ephemeral delights that could have been money in a savings account, dinners out, college textbooks. Independence Day became an orgy of frivolous spending on only a few seconds’ worth of pleasure, a symbolic representation of a nation dedicated to overspending on unnecessary luxuries.

But as I continued to watch, I began to enjoy myself again. I love fireworks, and the kids down the street were clearly having the time of their lives watching them. And the view from the hill became a celebration, a few hours out of the year when we put some of our hard-earned money into lighting up the night in joy. I thought of how I would like my future children to see a sight like this. Suddenly the expenditure (admittedly not mine) was useful and noble rather than wasteful.

You may have seen the dancing girl illusion on the Internet, in which a figure dances either clockwise or counterclockwise depending on how you look at it. (The “left brain versus right brain” bit attached to it means nothing.) This is exactly what my brain was doing while watching the fireworks: switching out one interpretation for another, without specific stimulus for switching. As in the dancing girl illusion, neither interpretation had any more basis in reality than the other; no one can measure what it’s worth to celebrate one’s pride in one’s country, or to be part of a tradition that millions of people are participating in at the same time, even though unseen.

Unlike the dancing girl illusion, the interpretation I choose to accept will affect whether or not I buy fireworks next year, whether I’m willing to spend money on Christmas decorations, whether I tell my children about Easter baskets or take them to our family’s graves on Memorial Day. Discretionary spending is just that, discretionary; I can choose to spend it on things that are important to me, or I can save it for things I feel are more worthy. Are fireworks on Independence Day worth the money, money that you might otherwise put away to earn interest or use to buy fancy food or new clothes? Only you can say.

5 Ways our Brain Works to Wreck our Finances

1. Redefining Needs

Perhaps it’s marketing or perhaps it is our culture, but we’ve gone from wanting certain possessions to NEEDING them. Whether it’s a top model car or a specialty coffee, we confuse the difference between wants and needs. We only really NEED food, shelter, companionship, and a job to pay for the food and shelter. That’s it.

2. Psychological Addictions

Not all addictions are physiological. Some are much more complex. Smoke breaks are both times to smoke and a break. Often it’s the “break” aspect that helps people relax. The same applies with coffee breaks, impulse shopping, or gambling. These things make us feel better in our brain, and as a result, we become addicted to that feeling.

3. Unrealistic Understanding of Risk

Whether it is through denial or simply overconfidence, people often invest money they can’t afford to lose in investments that are at a higher risk Or, we assume because an investment has performed will in the past, it would

4. Procrastination Rationalization

Our brains are often magnificent at rationalizing actions or lack of them. This can keep us from acting at times that would most benefit us. We avoid making changes in the present that can benefit us in the future, and we always have “good” reasons.

5. Inability to Admit Mistakes

Because we often attach our own self worth to the effectiveness of our decisions, mistakes are viewed as diminishments of ourselves. Because of this and many other reasons, we tend to avoid admitting when we’ve made a mistake, which prolongs the time until we work to resolve it.