Dr. GoodCents: Maximizing the Bang for Your Buck

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financialhealthsmReviving your financial health when you’re broke is a lot like losing weight when you’re fat and overweight: There’s a simple and miserable way to do it wrong and a more complicated and enjoyable way to do it right.

If you go on a starvation diet, you’ll lose some weight quickly, and you’ll probably gain it right back again. Nutrition experts know that people won’t go without the pleasures of food for long, and the important trick is to gain more enjoyment from fewer calories. Financial experts – at least us psychologically minded ones – know that people won’t go without the pleasures of consuming for long, and the key is learning how to gain more enjoyment from fewer dollars. Research can show us how.

Novelty is the Spice of Life

The key psychological principle here is the process called habituation: As stimuli are repeated, responses to them become weaker and weaker. In other words, we get used to things that are repeated over time. This is why we don’t hear the sound of the air conditioner and our spouse’s snoring unless we stop and think about them. Habituation is the simplest and most basic of all learning processes; even amoeba habituate to repeated stimuli!

Habituation is often our friend. It is the basic coping process described by the saying that “time heals all wounds,” and it helps us adjust to misfortunes and setbacks. But habituation works against us when good things become familiar, and we come to take them for granted.

When Starbucks first appeared, people got a kick out of buying a really good cup of coffee from a convenient place and bringing it up to their office. After a while this became routine, and because there is little pleasure in routines, we upgraded to lattes. But no one gets a charge from their 143rd latte, so now, to give ourselves a treat, we need something more along the lines of a grande upside-down caramel macchiato blitzer with soy milk and pumpkin spice – which costs a lot more money (and has a lot more calories). What happened to our pleasure in that really good cup of coffee? Habituation.

In its most fiendish form, habituation causes the problem called “tolerance,” which occurs in addiction when users need more and more alcohol or other drugs to get the same kick. Even in its non-pathological, normal forms, this process often robs our readily available pleasures of the potency they could have. In financial terms, habituation means it takes more and more bucks to get the same bang. How can we get the mojo back?

Mix It Up

A thoughtful review of your expenditures might reveal habitual ways of spending that have become too routine to provide much enjoyment. The “Starbucks factor,” beloved of personal finance experts, might be an important example of this for you. Four dollars a day multiplies out to real money in the course of a year, and it might be worth it if the money delivered real happiness, but it’s unlikely that something you do every workday can accomplish that. If you invested in a good coffee machine (there’s probably one stuck in the back of a cupboard), and you made your own coffee most workdays (which actually takes less time than standing in those lines), when you announced a Starbuck’s day to yourself every week or so, this would feel like a treat, because the habituation would be disrupted.

The same goes for eating lunch in restaurants, only with more money (and calories) at stake. “But I’m used to it,” you cry, “so taking it away would hurt.” Exactly. This is the sense in which spending and consuming can become like an addiction.

And the solution is the same: withdrawal, followed by cravings – which get worse at first and then dissipate over time if you persist with your plan, because habituation will become your friend again as you get used to the new way of doing things. It usually takes about three weeks to develop a new habit. In the meantime, you can encourage yourself by realizing that you are saving money, conducting an interesting psychological experiment, developing self-control, and setting the stage for a renewed appreciation of Starbucks and going out to lunch, which will seem like treats again once this re-engineering of your habits is completed.

I didn’t mean to pick on food. The same strategy will work with any routine, habitual way of spending and consuming.

Cutting habitual spending is the hard part of a strategy of diversified consuming, but it’s not the whole thing. The fun parts of this approach are first, of course, valuing the money you save, and second, using some (not all) of that money to buy new products and services. Yes, spending money is part of this overall strategy for saving money. With your personal balance sheet moving toward a firmer footing, you can feel justified and virtuous in looking around for new pleasures to purchase, and you will appreciate them more because of their freshness and novelty.

Buy Experiences, Not Things

Research on the psychology of money has consistently shown that a given amount of money spent on experiences produces more enjoyment than the same amount of money spent on material objects. One reason is that objects – a new purse, a new car, even a new house – stay the same day after day, year after year, so habituation takes place and our response to them diminishes. Having an experience, by its nature, usually possesses more novelty and variety than owning an object.

As a result, people report getting more out of travel, sports, hobbies, and other activities that cost money than they gain from buying clothes, jewelry, furniture, and so forth. The big weakness of experiences, as an investment in well-being, might seem to be that they are so temporary – once they’re over, they’re gone — while objects last and last. But this view doesn’t take a big factor into account: memory. Experiences, when they are remembered, and especially when they are shared, do last.

Remembered experiences are often are most treasured possessions. And taking pictures with your phone is so inexpensive! Diverting some of our spending from material things to the purchase of experiences makes it possible to live more richly and more thriftily at the same time.

It’s a cliché but it’s true: knowledge is power. The simplest way to get pleasure from food is to glug down lots of sugar and fat, and the simplest way to get pleasure from money is to spend lots of it on anything and everything. These two simple strategies will leave us fat and broke! The more difficult but, in the end, far more rewarding approach is to be thoughtful and smart, by eating a balanced diet of a variety of healthy foods and by spending money in a careful, psychologically sophisticated way that ensures some savings while maximizing the bang we get from each buck we spend.

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A clinical psychologist with nearly 30 years of experience, Dr. Shapiro is ready to answer questions, offer advice and share strategies to help you alleviate the mental stresses of money management. Send your question to GoodCentsDr@gmail.com and it may be answered in an upcoming column!