Money—an abstract concept—a piece of paper with numbers written on it. It is a quintessential part of life, but yet many are struggle to keep up with it. What are the problems?
The first reason is that when we have an urge to buy something, we don’t think much what else we can do with that amount of money. This concept is known as opportunity cost. Dan Ariely, a well-known behavioral economist, talked to customers at Toyota dealership and asked them what purchases they were giving up to purchase a car. Most of the answers were they were giving up a different type of car. Only a few of them said they were sacrificing other opportunities, such as taking a vacation elsewhere. That means, for most people considering alternatives or other opportunities didn’t come naturally.
The second reason is value cues. We as a buyer often pay attention to “sale” or “limited time offer”. In 2012, JCPenney had a regular practice of marking up regular prices, then have coupons, discounts, and sales to bring them back down to their actual prices. As a result, customers these as their value cues to think they spend money on these special bargain.
On the same year, a new appointed CEO—Ron Johnson—didn’t like this misleading practice and decided to have the fair practice. He got rid the bargain and just sell the items on the normal retail value. Customers were not happy and JCPenney lost $985 million within a year. Needless to say, Johnson was fired.
The third reason is we as human being are sensitive to language and ritual toward things. In a restaurant menu, the description of “complex and earthy notes of oak and tobacco” on a wine will make customers willing to pay $80 for bottle of wine even though they wouldn’t buy the same bottle of wine at local grocery store for $30.
Another thing related to wine is the ritual that comes with it. We often go through the process of pouring, swirling, and smelling before finally tasting the wine. These steps of wine ritual give the extra significance.
The fourth reason is related to our current way of living: subscription. Subscription services, such as music and video streaming, meal delivery, or goods subscription box adds up our monthly expenses. The thing about subscription is sometimes it can be difficult to cancel—or worst some people don’t even remember when they signed up for it.
With all the spending problems, how can we prioritise saving?
The best answer is to prioritise it before anything else. The best way to do it is to remove temptation by setting up a structure where a bad decision is not even an option. If you’re a lousy person with credit cards, the best way is not to have credit card at all—only use a prepaid debit cards. If you have a saving goal, it would be great to have automated saving account that deposit your income each month and you only allow to spend what left after it.
If you want to learn more about our behaviour with money, I recommend Dollars and sense