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Personal Finance FAQ

Saving Versus Spending: Why We Are Lying To Ourselves

If it’;s for sale, you have to buy it, right?

“The oil men were acting like the peddler who lost money on every sale but tried to make it up on volume.”
-Paul Mallon

When Filene’s Basement closed, the hordes gathered to pick up the remnants of the bankrupt chain. The bankruptcy administrators held a liquidation sale, and people came to buy. One woman tells her story (approximately 8:30 in here) of how she went and bought seven pairs of sunglasses. Her response when asked why? “Because they were 70% off.” I was listening to this NPR Planet Money podcast while walking the dog and let out a primal groan of angst. My dog stopped, expecting to need to leap into action to rescue me from some unknown assailant – probably one of the neighborhood cats. This woman was victim of a lie we tell ourselves all of the time: we’re saving money when we’re actually spending it needlessly.

How often have you walked past a storefront window, seen something on sale which you didn’t need, thought “Wow! What a great price!” and subsequently bought it? After the purchase, you have a pang of regret – called buyer’s remorse – and rather than marching back to the store to return the item, you tell yourself that you saved money.

You’re lying to yourself.

Why do you do this? Why justify buying something you didn’t need with sophistry? The answer has to do with a mental coping mechanism called loss aversion. Loss aversion means that you would rather lose less than gain more. The classic example is when you’re presented with a sure thing versus a chance to double your money. Let’s say I offer you $1 or a coin flip where heads gets you nothing and tails gets you $2. Even though both of these scenarios are equivalent, most people will choose the $1 sure thing. Now, let’s say that you owe me $1 and I give you the chance to do a double or nothing coin flip. Heads means you owe me nothing, and tails means you owe me $2. Most people will now choose the coin flip. If we take this example further, the higher the stakes go, the more people are willing to leave money on the table. You might take $1 or a coin flip, but wouldn’t take $0.99. However, if you were offered $95 or a coin flip for $0 or $200, you might take the $95. Raise the stakes to a coin flip between $0 and $1,000,000, and you might take $400,000 as a guaranteed payment. That’s why the banker on Deal or No Deal never offers even odds.

Monkey Brain will buy an item simply because it’;s on sale. – Click to Tweet

How does this relate to the item on sale that you just couldn’t resist? You’ve created a mental construct to protect yourself from further loss. Rather than saying that you spent—or, in this case, lost—the money you paid for the item, you project a gain, which is the amount you saved on the item off of the retail price.

How do you protect yourself from your impulses?

  • Always shop with a list. If it’s not on the list, you don’t buy it.
  • Take 15 minutes to walk around before making the purchase. This allows your frontal cortex – the thinking part of your brain – time to overcome the limbic system – Monkey Brain.
  • Have a subaccount for impulse buying. Let your inner Suzy Saver have the moment of joy with small purchases. This also prevents you from feeling so constrained if you need to cut back spending to reduce debts or to pay for an upcoming purchase.

How do you fight Monkey Brain when it comes to impulse spending? Tell us about it in the comments below!

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

6 replies on “Saving Versus Spending: Why We Are Lying To Ourselves”

Good post, Jason. I’m glad to see financial planning focusing on the psychological difficulties that people encounter in managing money. I think we might all agree that the U.S. is the land of “more”. Once you see how your desires are manipulated by marketing, and once you realize that “more” is really “less”, you can resist the impulse to acquire things you don’t need or truly want. It’s sometimes hard to remember those experiences we all have of wanting something, getting it, and once you have it, asking yourself “why did I bother?” I am always astonished at the amount of stuff that is produced for people to buy: stuff that is trivial, useless, unaesthetic, and even expensive. I’d rather pay more for something useful, well-designed, and of good quality, that I know I will use. I’m looking forward to hearing what you have to say about the many ways that Americans waste money and ruin their own financial prospects and security. Saving money and investing sensibly doesn’t mean sacrificing enjoyment of life, or missing important experiences along the way.

Thanks for commenting, Diana! Yes, you’ve hit the nail on the head with something that a lot of people don’t realize: we value experiences more than things.

Your statement about buying good quality reminds me of a family member, who shall remain unnamed, who was notoriously cheap. He’d buy the cheapest tools, nails, you name it. Invariably, whatever he used the cheap tools and material for would break, and he’d have to repair it (usually again). While he saved money in the short run, he probably cost himself much more in the long run.

Unfortunately, few banks really allow you to use them. ING is one of them which comes to mind, although with the recent acquisition by Capital One, I’m not sure how long they’ll keep that up. We just use a good old-fashioned spreadsheet which we include in our monthly budgets.

I love that you are bringing awareness to what really drives a person’s financial situation and behaviors: the mind. In my work, and as I have reflected within myself, I have come to realize that most people operate from a subconscious illusion that there “isn’t enough” …fill in the blank-in this case, money or things. And, this can drive us to buy something when it appears to be a good deal. We keep buying on sale so that we can have enough. Before we know it, we have created evidence of the illusion because we have plenty of stuff we don’t need and not enough of what we do need because we spent most of our money on the meaningless “good deals”! The truth is that, as humans, our capacity to create is powerful and can be seen just by looking around at all the stuff we have now that we didn’t have when man first arrived to the planet. We have managed to create more than enough! However, because our beliefs fuel our ability to create, and we often believe we don’t have enough, we have a lot of evidence right now of its truth. Luckily limiting beliefs can be spotted and eliminated! I have a lot of fun helping people to do this! 

Hi Laura–Yes, I think that we’re accumulating things because we’re trying to fill some sort of void in our gaps. As Dr. Mihaly Csikszentmihalyi showed in his research, experiences make us happier than things, yet, with the conspicuous consumption everyone engages in, we get caught up trying to keep up with the Joneses.

You are spot on with your points about our inner scripts and our limiting beliefs. It’s what Monkey Brain uses to get his way. No matter how many bananas you throw at Monkey Brain, he’ll never be satisfied, so you have to step outside of that endless cycle to rise above it and channel your impulses to focus on the things which matter most to you.

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