Many U.S. workers report that the changing economy has made their income less predictable due to variable working hours. According to several recent studies, a significant number of American families live from paycheck to paycheck, and would be unprepared to deal with an unexpected expense of just $400.
One reason it’s so hard for us to save money, according to Richard Thaler, winner of the 2017 Nobel Prize in Economics, is that we human beings don’t naturally act with the necessary level of rationality when making economic decisions.
We’re not as rational as we think
Thaler’s studies focus on analyzing the irrationality of human economic decisions in order to find patterns and determine how to “nudge” behavior in a more rational direction. All too often in the past, it was assumed (incorrectly, it now seems) that human beings were consistently rationally-acting; this idealized human being is referred to as “homo economicus.” On the contrary, the marketing industry learned long ago that it could use emotions as a tool to manipulate consumers, whose decisions are often anything but rational.
The field of neuroeconomics seeks to understand the process of economic decision-making by looking at its biological underpinnings; researchers in this field allege that between 85 to 90 percent of our economic decisions are not made consciously, but rather by the unconscious part of our brain. We tend to be serenely convinced that, in order to make an economic decision, we first analyze information and then, through a process of reasoning, arrive at a decision. However, investigation in neuroscience seems to prove the contrary: instead of reasoning, we tend to rationalize. In other words, once we have made an irrational decision, we look for reasons to justify our choice.
Consequently, a family that wants to save money will be doomed if it doesn’t take into account the fact that our economic decisions are at least partly irrational. Rational economic commitments to saving money and using it wisely are difficult to sustain throughout a single month, let alone for an entire year. Our plans to spend less money tend to fail, just as when we get a gym membership as a New Year’s resolution to improve our health, but end up not going because our day-to-day decisions distract us and lead us to break our resolution.
However, based on this knowledge, there are certain techniques we can implement, taking into account the theories of Thaler and of neuroeconomics, so that we and our families can be more successful in spending less money and saving for the future.
Set per-purchase limits
First of all, we should not make significant spending decisions impulsively or immediately. Marketing is well aware of our brain’s propensity to seek gratification by following impulses, and consequently, it takes advantage of a sense of urgency to get us to spend money. (“Buy now! Limited supply! This price won’t last!”) We should set a certain cost limit ahead of time — $100, for example — above which we commit ourselves to sleeping on any decision. Few things are so urgent that we cannot wait 12 to 24 hours before we buy them.
“Hide” money from yourself
Another useful strategy consists of starting the month by setting apart a determined amount of savings in a different bank account, or in cash in a separate money box or safe. This allows us to “forget” that we have that money available, and makes spending it impulsively that much more difficult. Since using that money requires more time and energy, impulse buying is likely to be somewhat inhibited.
Keep a balanced budget
A third technique is to draw up a budget at the beginning of the month for each kind of expense. This is a good strategy, because before spending on anything we are forced to think of its cost not only in terms of ticket price, but also in terms of how much it might affect our other budgeted categories; if we go over budget in one area, we have to sacrifice something else. These considerations can help us realize whether or not a given expense is truly necessary. For example, imagine that you would love to buy a new laptop. You know how much money it costs, but if you drew up a budget at the beginning of the month, you also know that this month you would need to compensate the cost by not going to the movies with your family, or by not buying your child the sports uniform he or she needs. This gives us a sense of proper perspective and a real awareness of what is being sacrificed if we make certain kinds of economic decisions.
Keep your monthly payments visible
Fourthly, we must avoid certain dangers associated with paying for things automatically and in installments. Without a doubt, there are some things we cannot buy with the money we have available from one month’s salary, so sometimes we have to pay in installments. The problem with monthly payments — especially automatic ones — is that we can forget about or be careless with this monthly expenditure.Our unconscious brain feels gratified by the initial purchase, but afterwards it tends to forget the negative stimulus of the monthly sacrifice to keep paying for it. Consequently, it’s important to make that payment visible each month and keep it in mind. It can even be a good idea to celebrate in some way the last payment. This will help us put the economic decision into proper perspective, and will keep us from getting over our heads in debt due to being negligent regarding our financial obligations.
Trends are not (necessarily) your friends
A fifth recommendation, particularly considering the expenses that are common this time of year, with the excuse of Christmas, is that we must be careful not to fall into the gratification of following fads. Trends, from a psychological point of view, play with our need for a sense of belonging, in such a way that our brain feels gratified when we feel accepted as part of the in-crowd. Given our psychological need to be accepted, trends offer us a variety of ways to be accepted by society and by our peers. This gratification that our brain is seeking requires economic sacrifice. Not following trends or not having what our neighbor has can make us tense or anxious; we feel like something is unresolved in order for our brain to fit into the “clan” and be at rest.
To deal with this objectively, we need to educate ourselves and our children in the ability to analyze our real needs, so we don’t simply follow the masses. Being aware and in control of our own needs makes us free; being dependent on what other people tell us we need makes us slaves. So, when we feel an irrepressible impulse to buy a trending product that “everyone is buying,” it’s worthwhile to think whether or not this thing fills a real need. It can be helpful to think of other things we bought in the past due to similar trends — like that treadmill or elliptical trainer that we shelled out for when it was all the rage, and which is now being used as an expensive coat hanger.
Take some time to shop around
Another important technique for saving money is to remember that sometimes we need to spend time looking for the best prices. If consumers systematically look for the best deals, it pushes vendors to be more attentive to their competitor’s prices and more aware of the need to compete. That is to say, not only will comparing prices have the direct effect of saving money by spending less; it will also help narrow vendor profit margins so we can save more in the future. There are many resources online to help us follow prices — web pages, browser extensions, etc. — which allow us to track prices for specific articles, and even send us alerts when the price has fallen to a target we have specified.
Don’t be tricked by sale prices
Lastly, it’s worth repeating the age-old advice not to fall into the trap of sales in which vendors offer incredible discounts, when in reality the non-discounted price had already been inflated. Our brain, in constant search of gratification, tends to look to the original sticker price of a product as an indication of its true value. As a result, we are more likely to buy a product that is announced as costing $20 with a 50 percent discount, than the same product announced as costing $10 from the start. The cost is the same, but our brain gets greater gratification by thinking that it obtained a product actually worth $20 for the special sale price of $10.
We hope that these recommendations, based on neuroeconomics and the theories of Richard Thaler, can help us not just to plan and maintain savings at a level appropriate for our finances and family life, but also to have the tools we need to live the Christmas season with a healthy sense of perspective, avoiding unbridled consumerism. Becoming aware of the imperfect rationality of our own brain could just be the key to increased freedom in the midst of a highly commercialized society.
Read more:
How money stresses your brain — and what to do about it
This article was originally published on the Spanish edition of Aleteia and has been translated and adapted here for English-speaking readers.
And today we celebrate...