Spend or Save?
How we think about money
I’ve never really made a budget. Somehow I’ve always been able to pay my bills and have fun and buy things I wanted. Now don’t get the wrong impression… I’ve never made a lot of money. And there were times when I had to get a second job1 to supplement my income, like when my job changed and my salary dropped $8,000 a year. But I always did the things I wanted to do, like buy a Mini convertible that I obsessed over for more than a year, or host a huge dinner party with more than 30 guests (where I cooked everything, guests only bringing what they were drinking). Back in those days I owned a house, 8-acres of land with a rustic cabin on it, and all sorts of things that made life fun and entertaining. Trust me, I’m not bragging about this, I’m just establishing the tone here. I don’t think I was very different from a lot of other people.
Needless to say during this time I never thought about saving for retirement. I don’t even remember having a savings account. I was a prime example of someone keeping the economy alive and well - as soon as I made money I spent that money. It was only when I became a teacher and I began automatically putting part of my paycheck into the 401k retirement system did it dawn on me…. I don’t want to work until I drop dead. I surely didn’t plan on teaching young people who would be one-sixth my age. I didn’t want to show up to class using a walker, wearing Depends, and having bouts of Alzheimer’s as I try to remember the content of the subject I teach. So I finally got my act together and put as much as I could directly from my paycheck into that savings fund and forgot about it. It’s amazing how you don’t miss what you don’t have. That’s definitely the case with money. If you don’t see it in your wallet or bank account, you don’t have it. And if you don’t have it you can’t spend it.
Now I know there are credit cards, and those little plastic cards can be life saving or life destroying. It’s all how and when you choose to use them. But I’m not here to talk about the pros no cons of credit cards. I’m here to discuss the psychology of how we tend to budget poorly, spending more than we have, and how we justify it in our mind.
This month, a podcast called Hidden Brain is doing a series called Money 2.0. The episodes deal with how we think about money. How often have you fell for a sale, buying more things than you really wanted, just because of the savings you would get? How often have you seen a friend make money on investments, only to do the same and lose everything you put in (anyone following someone else in the crypto world here)?
Get rich quick schemes, credit card debt, low saving rates, never thinking about saving for the future - these are all problems. But on the other hand, being miserly and never spending or thinking we have enough money is also a problem. Yes, there are actually some people who would rather have lawn chairs as living room furniture as opposed to a couch or loveseat. These people never spend on things that will make them happy or more comfortable. Opposite of this are the people who “live for today”, who seem to have no impulse control when shopping. Psychologists talk about money scripts, which are the scenarios we have in our mind about money. Some of these are:
Money worship - thinking more money and more things will make you happier. You put money on a pedestal.
Money avoidance - believing that rich people are greedy and that money corrupts. You believe that living with less is better.
Money status - placing a lot of value on money. People who do this confuse net worth with self worth. This is the “keeping up with the Jones” syndrome.
Money vigilance - making “saving for a “rainy day” important. Thinking about the future and being less likely to brag about what you have.
Why are we so bad at budgeting? Why do many of us blow our budgets month after month? Basically we don’t plan for “unexpected” events. In reality, several of these unexpected events are actually recurring but infrequent. For example birthdays or anniversary may seem like an unexpected events, but they occur EVERY year. We also tend to splurge and spend more on things we consider a “once in a lifetime” event, such as a home renovation or a vacation. We tend to spend more for these events, choosing more expensive kitchen appliances or a fancier hotel because we think we will never have this experience again. If we looked at these expenses more critically we would realize that “unexpected” events are actually something we should realize will occur and plan for.
Some people also tend to treat any non-income money they receive as a windfall, cash they can spend on frivolous items. In reality the money received is already owed to them, such as in the case of a tax refund or a reimbursement for a job expense. Using this windfall leads us to spending the same money multiple times.
Whatever your thoughts on money are - extreme saver or extreme spender - understanding how psychology plays a role in your decision making can help you get a handle on your finances. By learning about these beliefs you can change your way of thinking and have healthier way to look at and handle your money.
And if all of this make no sense, maybe this video will.
That second job was when I lived in Minneapolis. It was a paper route, delivering newspapers on Saturday and Sunday morning using the sports car (an Mazda RX-7 I bought just before I got laid off from Honeywell). Delivering papers in the spring, summer, and fall was great exercise. But winter… that was brutal, especially when my face would freeze and my eyebrows would be crusted with ice. I’d leave my car running, jump out, deliver to three or four houses, then jump back in the car to defrost. It was invigorating.