The “Do-I-Have-Enough-For-This?” Effect
Published on - August 15th, 2009 (Modified on - September 2nd, 2009) (by Adam Baker) 
This is a guest post from Baker, who writes about personal finance at Man vs. Debt. Baker is a potential Staff Writer for Get Rich Slowly. His first post described the many advantages of couchsurfing. Along with his wife and 15-month-old daughter, Baker has recently moved overseas to New Zealand, where his young family is passionately continuing their own personal “war” on debt.
“Do I have enough money for this?”
It’s a very simple question, but one that has had tremendous implications in my financial turn-around. There was a time, not too long ago, when that combination of words didn’t exist in my life.
Lately, I’ve stepped the phrase up a notch with some mental emphasis, “Do I really have enough money for this?” With the new emphasis included, my impulse purchases don’t stand a chance. Well, at least most of them don’t…
You see, our brains are incredible machines. They are bombarded by over a billion tiny bits of information on a daily basis. Without an amazing filtering system, we’d go insane within minutes. It’s during the times I can’t locate the keys in my pocket that I’m most glad I don’t have to constantly think about breathing, walking, or swallowing.
Unfortunately, there’s a downside to this miracle. From a young age, we have the responsibility of conditioning our brains what not to filter. We’ve been assigned the impossible task of reminding our brains, “Hey, stop… I want to notice, observe, or think about this.”
Take for example the feeling you get when you notice someone looking at you. Most of us have conditioned our brains to flag us when someone is observing us. We want to look up and make eye contact. “Why’s this person looking at me?”… “Do I look funny?”… “Are they hitting on me?” The point being that we want to know badly enough that we’ve cued our subconscious not to filter this type of event.
What in the world does this have to do with Personal Finance?
For me, absolutely everything. This is the single reason that convinced me to completely eliminate credit cards from my life. I noticed my credit cards seemed to thrive on numbing me to the buying process. I didn’t naturally ask myself any questions when I pulled out my credit card to swipe. In fact, it was just the opposite. You know what I had anchored to my credit cards? “If I pay it off at the end of the month, it’s o.k.”
Not a probing question. Not an obstacle to keep me in check. I had subconsciously attached a justification to my credit card use. Realizing this made me sick.
After more thought, I realized I had a different anchor to the process of using my debit card. I was so worried about overdrawing my checking account that my first instinct was to ask the million dollar question:
“Do I really have enough money for this?”… “Sure, I just got paid on Friday… wait… why the heck do I need the 50th anniversary edition of Scrabble. Is the standard one at home not good enough?”
This was truly a “holy crap” moment in my life. My first response with debit was to verify my purchase instead of simply validating it. It was one of the single most powerful moments in my financial life. Why is this? What’s different? How can I leverage this effect? Are there other questions I could be asking myself?
Let me take some time to explain this isn’t an attempt to change your personal credit card usage. That’s not my objective. However, I do think it was worth outlining how my own physical use of each of them sent me down a drastically different mental path.
After this moment of financial enlightenment, I had two choices:
- Break apart and redefine the conditioned responses I had when using of my credit cards; or
- Stop using them altogether and maximize the benefits of substituting debit cards.
I’d like to admit here that both are viable options. I wasn’t opposed to the little pieces of plastic that said “credit”; after all, it was my emotional attachments that were truly to blame. But instead of trying to rewire my thought process, I decided to embrace the existing system I had already built. The result was life-changing. Literally.
What does this mean for you?
That depends. Have you taken the time to think about your conditioned responses to using different forms of payment? I’ve talked to a lot of people who claim different spending methods don’t affect their purchases at all. They could pay with “0% interest for 24 months” or by counting out individual pennies, it would make no difference. Surely, there are some of you out there. For me, though, I had tricked myself into thinking I was a member of this exclusive club when I really wasn’t. Finally, I hit a point where being honest with myself was more important than being right.
My advice is to experiment with different purchasing methods and really concentrate on any conditioned responses you may have. That’s what worked for me. Be honest with yourself no matter what the result. If things aren’t up to your standard, fix them or change them. Most importantly, be aware of them.
Look, we all know J.D.’s “do what works for you” mantra. I’m a big fan of it, too. But, in my case, the “what” was no longer “working”. In fact, what I needed most was to experiment with techniques that increased my “what” options.
More recently, just this sort of experimentation has lead me into spending based on the envelope budgeting system. If you are searching for over-sized helping of the “do-I-have-enough-money-for-this” effect, try standing in front of the grocery clerk and hearing, “That’ll be 82 dollars and 12 cents”, only to look down at the measly $64 within your “FOOD” envelope. It only takes a couple embarrassing times of putting back groceries before you start to radically shift your purchasing habits.
After all, isn’t positively changing behavior the ultimate goal? It is for me! Which is why I’m constantly striving for opportunities to stop and think, “Do I really have enough money for this?”
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It’s great that you were able to override the impulses created by advertising and begin spending consciously. I think that if we all just ask ourselves, “Do I really need this?” and “Can I really afford this?” it would solve a ton of overspending problems.
It’s so funny to me how human beings lived for so long and survived before the invention of tv’s, walk-in closets and 99% of the garbage that’s out their today. In reality our real needs are few and very simple, but now we have all this stuff out there confusing us lol.
-Gen Y Investor
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Before I got to the focus on what different forms of payment trigger in the writer, I had already realized that the form doesn’t have any effect on me. Credit cards don’t remove the consciousness I have of whether I can “afford” something or not.
However, I do notice that I need to be a little more conscious about referring back to what I already have when attracted to additional possessions. I JUST closed the tab for a shoe closeouts website that had some GREAT deals, because I realized that I already had a pair of shoes that “did” what those did – in fact the ones I have are better quality. $25 (including shipping)…saved! LOL.
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I recently wrote about the benefits of credit cards, and the ‘boilerplate’ response by many is that credit cards will make you spend more. Period.
Of course, the statistics back up this view, but I’m not so sure that credit cards are evil just yet. It’s simply that most of us use them as loans, instead of spending tools.
I think you make a good point in that it’s not necessarily the tool that’s the problem, but our approach to using it. Changing the psychology of our approach changes the effects of what happens on the back end.
Like you, I also use the envelope system, but I do it with credit cards. I can control my spending within the defined parameters and still get the benefits of credit card use, like rewards and consumer protections.
A lot to think about on this post!
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Thanks for the reminder to personalize our purchasing decisions based on what “I” can afford. For a long time I purchased things with one question in mind – is it a good deal? I quickly began to realize that I simply couldn’t afford every good deal. Now I have two criteria – “what I can afford” and “what is a good deal”. Life is so much more simplistic when you do buy what you can afford.
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Nice post!
I totally agree that when I am using my debit card instead of credit card, I spend a few minutes to think: did i transfer money from the savings account to the checking to cover this? why am I paying cash NOW? etc. That’s why I prefer to use a credi card on most purchases! (Sorry, going the other way from you – but that’s what works for me.) I don’t buy what I don’t need most of the time. Actually, the interest on credit cards acts like a yellow/red light… that if I overspend, I may lose money by paying interest.
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I think this would be a better article without the focus on credit cards. Yes, they seem to be trouble to a lot of people, but some use them responsible. There’s also a lot of people that would struggle with this question without using a credit card and they should’t feel like they’ve already won.
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I agree with Baker 100%. After paying off all my debt, my rule was that I could use my credit card so long as I paid the balance off each month, and I have. But I noticed that there was random, increased spending throughout several months using it, but since I could pay it off easily when the bill arrived, I didn’t give it much thought. And then there were 2 months in a row that really got my attention because I overspent my monthly income and then had to transfer a substantial amount of money from my savings account both months to meet my rule of paying that card off, which I did. But now there was something wrong with that picture because while I still had a 0 balance on my charge card, I was depleting my savings account, instead of building it, which is of course not what I wanted, and which was not in my best interest at all. I realized that if I didn’t do something, that entire savings account, over time, could be wiped out to keep that credit card at a 0 balance! That scared me straight. It was about that time that I finished reading Your Money Or Your Life and that book made it crystal-clear to me what my values were.
So I reworked my budget, making sure I budgeted for those specific things that were important to me, setting up 6 automatic transfers from my checking to those various savings accounts each month, and began using a cash/envelope system, and what a difference! All the spending leaks got plugged and were redirected to those savings accounts. This budget showed me in black and white that “No – I can’t really afford that” – but since money was being directed to things I wanted, my values, then that was okay. I also know if I want something bad enough that I can save up for it too. Interestingly, if I have to save for 2, 3 months, it made me realize, you know, I really don’t even want it.
Before I go to the grocery store, I look inside my envelope to see specifically how much money is in there, and then mentally add up what I’m buying as I put it in my cart. That way there won’t be any surprises when it’s time to check out. Interestingly, my spending, without using my credit card has lessened considerably and I no longer spend cash on random things, but on what I know I will really use, so I’m no longer wasting money, and those spending leaks have stopped, and best of all, those savings accounts are growing.
What a legacy you will be teaching your daughter, to learn to live within you means! My only regret is not having implemented this cash/envelope system when I was your age! Better late than never though.
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@Chessiq said, “I don’t buy what I don’t need most of the time.”
The question isn’t do I need this? There’s a huge list of things my husband and I need and that our house needs. That doesn’t give us the green light to buy these things. The important question is do we have the money for this particular item at this particular time? We may have lots of money in the bank but if it’s earmarked for property taxes, an important home repair, a downpayment on a new car, whatever, then the new livingroom furniture, treadmill, new wardrobe item, dining room table and chairs, weekend in Chicago, or whatever will have to wait.
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Shifting your thought process for spending takes will power, hard work and practice. I think you’re there when you have to put items back on the grocery shelf because you don’t have enough money; I loved this example. But it’s a daily practice. People are constantly influenced by different forms of media to buy, buy, buy! To resist temptation, I think we have to be careful about the different forms of media we put before our eyes and how often.
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I would certainly think differently about my purchases if I used cash, checks, or a debit card. When I use a credit card, I rarely even bother to pay attention to the amount of Stuff I am putting in my shopping cart. Because I know that even if I don’t have the money “right this second”, I’ll have it by the time the bill comes due. But despite not paying attention to what I’m Stuff-ing into my cart (pun intended!), I’m generally a thrifty gal, and overall I don’t buy anything I can’t afford to pay off as soon as the bill comes. But just as Baker says, just because I CAN buy it doesn’t mean I should. Sure, I have enough to pay it off at the end of the month, but how many other, better things could I have done with that money instead? I will still continue to use my credit card for all purchases that allow me to use it, though, because it is a rewards card for Amazon.com. I get free gift certificates for the website (which I shop frequently), so I’m actually MAKING money from using it. I LOVE to read, so it’s a great pleasure to be able to buy books FREE with the gift certificates I earned from my credit card. And since I never ever carry a balance, every penny they send me is free and clear “earned” money. So I can feed my book habit on someone else’s dime.
But rest assured, if something were to happen that prevented me from being able to pay off my card every month, I would stop using it! I HATE to owe money. (I just paid off my student loan last month! At least 2 years early!)
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At this point, I have a hefty savings account, so I do have enough money for many things. My question to myself is more–Is it a good value FOR ME?
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@Chessiq – I like how you’ve mentioned that the possibility of paying interest can sometime deter you even though you use credit cards. The point of the discussion is to be AWARE, which you clearly all. Cool perspective.
@Sandy – You’re personal story is nearly word-for-word my own. It’s so similar it’s actually scary. I tend to plan ahead better now in the grocery store, as well, but I have to admit a couple embarrassing moments when we were getting started with the envelope system!
@Barb1954 – I love that you’ve prioritized having the funds over your needs. That’s exactly why I don’t call this the “do I really need this” effect. While obviously there are BASIC essentials that would always come first, it’s inspiring to hear a real life example of someone with clearly defined priorities and the ability to stick to their guns.
@Jason – I agree, this kind of thing is a constant battle, especially with our cultures exposure to advertising and marketing of all sorts. I try to combat this by installing these types of questions as conditioned responses. I try my best to turn them into habits, which for me is the easiest way to fight back and to spend consciously (a.k.a. on my terms, not the advertisers).
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This is one of my favorites so far in the parade of audition posts. It’s really important to start thinking differently about money. My parents (who both are 65) do not have enough saved so that they are able to retire. When I asked my mom how much they spent every month, she gave me a panicked look. I asked her, “If you don’t know how much you spend, how do you know how much to save?” She had no idea.
There are plenty of people out there who overspend. I spent a week with my parents and aunt in Florida late last year and my aunt and mom went to DSW (shoe store) three times in that week! I went once and bought two pairs of shoes I actually needed. They asked me why I wasn’t buying more, and I shrugged and said “Because I don’t need any more shoes.” They didn’t understand that at all.
I hope posts like these get through to someone out there as a wake-up call. My parents have no credit card debt, but they don’t have a whole lot to show for the 40+ years they worked, either. It’s not about the debt — it’s about changing your thought process.
-Erica
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With the exception of maybe a house and a car if you have to ask your self “Do I have enough for this?” Then the answer is a definitive “NO”. The only reason I exclude cars and house is because there are so many factors involved in their purchase. And in the case of a car the purchase can be unplanned, like when you have a wreck.
I used to ask myself this question too, when I’d buy things. Almost always I’d answer “Yes”. Now I have my stuff together, am out of debt and have money to spend. I don’t ask myself that question anymore, but I’ve also curbed my spending habits a lot. The question I ask myself now is “Do I really need this?”
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@Baker – it’s great to be on the same page w/someone, all the way in New Zealand too, and yes it was a little eerie for me too! But eerie in a good way. Here’s some final thoughts I had, prompted by your story –
Using cash has really changed the way that I spend. It has truly been life altering too. All of a sudden, when I make the connection that I really can’t afford an item, it loses its appeal to me and the purchase doesn’t become impulsive, like it had been with credit cards. Instead, the purchase isn’t made.
I walk out of stores with my dignity and self-respect in tact, knowing that with my cash/envelope system, my needs will be met and my values that I have specifically targeted and budgeted for will too, and all that other stuff out there truly doesn’t interest me.
It’s a very relaxing and satisfying feeling. When using a credit card, there was nothing relaxing about it because I kept wanting to have more and more and more stuff. I was like a rat chasing the proverbial carrot on a stick! I could never get to that “enough” place or to that “I feel satisfied” place like I have been able to since using cash and living within my means. It’s a very freeing feeling on many different levels.
Again, thanks for your article today Baker!
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For those of you who use the cash/envelope system, do you have any clever way of dividing the money/carrying it around? I’ve been looking for something that my grandmother had many years ago which was a spiral bound book with just envelopes in it for an application just like this and it was sized to fit in your wallet. Any ideas?
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I gave up using credit cards about five years ago when I realized I was unable to use them responsibly. My life has been wholly better since then. Would I be able to use them responsibly if I tried again now? I see no point in finding out, I’ve been doing fine without them.
That said, in those ensuing five years, I’ve changed a lot of other things about myself financially as well — my income has gone way up and my desire for “stuff” has gone way down. Now, the answer to “Do I have enough for this?” is almost always “yes” for anything I’m actually considering buying. It’s “no” for a new BMW, but even though I’ll go look at their website, it’s not something I’d actually consider purchasing.
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Adam–You’re describing the “mechanics” of spending–that almost hurts! Most of the time we never think about what we buy or how we spend, which is why it becomes a problem.
It’ll do no good to say “I’m going to spend less money” without having an thought process that makes us interupt our natural inclination, which is of course to spend. We really do need to analyze why we do what we do, and then start to add different ways of thinking and other options we can take. It’s like psychological warfare with ourselves.
I’ll bet that wasn’t easy the first few times out!
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@Annemaria — this was important to me too because I did not want to deal with paper envelopes. I went to the $1 store and bought 4 wallets there, in different colors. They sort of look like checkbook covers, but they have a snap that you can open & put your bills inside. (They are 7″ by 3-1/4″). I use my regular wallet for my grocery money, and these for my other living expense categories.
Even though I get paid monthly, I load these wallets weekly, so every Monday, because for myself it ensures I’ll have money available each week, and not risk running out the third or last week of the month. It’s a lot easier to budget a week at a time than a month at a time.
If I have any grocery money left over at the end of each week, I transfer that cash into a clothing envelope. In other words, it encourages me to cook more at home, and make do with what’s already in my pantry and refrigerator, without compromising on nutrition. I’m willing to put that effort in knowing that the excess will go to something fun for myself.
Anyway, try the $1 if you have one near where you live.
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Being honest with oneself is definitely key. At the end of the day, it ABSOLUTELY is about changing your lifestyle and mindset. Just like keeping the extra weight off your body, you have to change your health mindset and eating habits to have permanent change.
Even though I have now 5 years worth of savings in one of my banks, I never look at it. Instead, I look at my “GO BROKE” bank, where there is just a razor thin margin of money there, which keeps me disciplined from spending much.
Best,
RB
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I use credit cards for almost every purchase, but I use budgeting to pre-determine if I “have enough money for this.” The question I ask is, “Does this fit into my budget?” I’ve built up a lot of savings, so I can afford to go over budget on big-ticket items like appliances or furniture, but I think long and hard about whether it’s worth it to dip into my savings for something.
I also allow myself to borrow from other months as long as I stay under budget in each category for the year. For example, I keep my gift spending low for most of the year because I know I’ll need to spend more on gifts in December for Christmas. And if I want to buy clothing in January that’s over my monthly budget, I have to do it with the knowledge that I can’t buy any clothing in February.
I have to admit that I’ve still had times times when I’ve been surprised by the total on my credit card bill, but when I look at each purchase on the statement, I remember that I already accounted for each one in my budget and made sure I could afford it. And of course I always have enough money set aside to pay the bill in full.
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Longtime reader. First time poster.
I have to admit the money envelope system Baker mentioned in his post brings back some good memories. That was one of the first ways I learned to stick to a budget (without making exceptions!). You might find it frustrating at first though when you come up short for the $100 concert tickets you wanted to buy because you’re “entertainment” money envelope only has $40 left for the month.
The payoff though as many have eluded to is that you really feel good meeting your goal (and more importantly STICKING TO YOUR BUDGET – thereby saving money you would have spent)
@Annemarie – You can buy a small notebook binder at your local office supply store and 3-hole punch some envelopes to slide inside for the money. The notebook should fit nicely in even a compact purse. I used to do this (minus the purse) and kept the notebook in my glove box.
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good article that reminded me of a recent purchase.
we haven’t carried cc balance in years, but i recently bought something for $16k on my cc a few months back. What troubled me, wasn’t that i couldn’t afford the purchase (I could and had the cash in the checking account), but why i was thinking i could run a balance and pay it off in three payments rather than just paying it off by the billing due date since my cc has a low interest rate. i completely ignored the fact that the reason i used the cc rather than a check in the first place was to get the 2% discount my cc gives me back. the debate i normally have in my head of whether i could really afford it (in this case, whether or not i really wanted to part with the $16k out of my checking account at that point in time since i was thinking afterward of splitting in three payments) somehow was lost. i ended up realizing that i shouldn’t have bought it on cc if i couldn’t afford it–that is, if i wasn’t willing to depart with the full $16k from my checking account right then and there. End result, i paid the bill by the due date.
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I started as a debit card user and switched to a credit card for the better rewards but psychologically I treat my credit card like a debit card. If I haven’t budgeted for it and the money isn’t in my checking account then I don’t buy it. I never consider my savings as spending money but instead “live paycheck to paycheck”.
Where I get in trouble is actually when I do something that requires I carry cash! If I take out 60 bucks from the bank and don’t use it at the thing I took it out for all of a sudden that starbucks coffee looks a lot more appetizing because my cash is “free money”.
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I prefer the “How many hours did I work to afford this item?” I asked that question for every major–and most minor–purchase…except for the home. Asking that question for the home would’ve made me cry.
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@Chiefcaba I agree with the cash thing. If I have money in my wallet it is as good as gone. I have found that by paying for everything with checks it has cut down on my spending. Writing a check is a pain but I have one of those huge business type checkbooks and I really don’t want to carry it around the store with me.
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“I recently wrote about the benefits of credit cards, and the ‘boilerplate’ response by many is that credit cards will make you spend more. Period.
Of course, the statistics back up this view …”
A word of caution on statistics. I find that there are a lot more people quoting statistics and studies than people who actually understand it. I have a question – how many posters here quoted statistics to support their argument? How many of them had at least one college statistics course?
There is an example often used in epidemiology – a kind of hobby of mind, I love to read studies for fun – that relies heavily on statistical analysis of medical data: “This disease affects men in their 50s. There are two known cases – a 98-year old man and a 2 year old boy”. This illustrates nicely how misleading averages can be. A 98-year old man and 2-year old boy — their average age is 50…
“People spend more on average” is not the same as “everyone is likely to spend more”. All “people spend more on average” really means is that if you take 100 people who use credit cards and 100 people who don’t than the average amount of money spent in the group that use credit cards is going to be higher. Since we have equal number of people in both groups, it means the total amount of money spent by people who use cards will be higher. But it doesn’t say anything about individuals. Even if 99 people in both group had spent about the same, and one guy spent more, you’d still get “people spend more on average”.
We do know from statistics that over half of credit card users are carrying balances. These people obviously spend considerably more than they would’ve without cards since without cards they wouldn’t have money to spend. There are even some people with huge credit card balances, and they spend a lot more money than they could have spent without cards. OK, so we have 100 people out of which over 50 spend more, and we know it already. Even if the rest – those who always pay off their balances – were to spend about the same or even a little less, the total amount of money spent by credit card users would’ve still be higher.
So unless people who love to cite these studies can either a) show studies that specifically looked at spending habits of credit card “deadbeats” b) can show the distribution in these studies, they cannot make conclusions about whether or not people who pay their balances in full spend more. Some may, some may not… There is no data that shows anything about spending of “credit card deadbeats”.
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Baker, Bravo! My favorite two lines…
You know what I had anchored to my credit cards? “If I pay it off at the end of the month, it’s o.k.”
VERY powerful concept – it highlights the fact that even people without a revolving monthly credit card balance can still have a credit card issue. Thank you for emphasizing the importance of conscious spending.
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Fully agree with you.
Once we get loss control in using credit card, then we will get suffer with monthly “debt payment” we have to pay for.
The most appropriate thing to do with credit card – I think – is to consider it as shopping tool instead of loan facility. By implement this way, every penny of card swiping is obliged to be paid by the end of the month.
As general conclusion about credit, let’s apply loan facility for productive purpose (i.e give some additional money back to us), not for consumption purposes. Otherwise, we will be stuck in struggling to pay our lifestyle.
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@Ann “How many hours did I work to afford this item?”
Me too. This was something my parents taught me when I was a little girl and wanted a toy. They’d say “mommy has to work this much time for it”. This was more dramatic in the Soviet Union where some toys cost a significant portion of money earned in a day and people saved for 3 months to buy a nice pair of shoes.
Another thing I do almost automatically is to think of amounts of money in terms of what else the same amount can buy. This helps me appreciate the value of money – another thing my parents taught me early on. Certain items worth it to me, others aren’t. An amount of money seems much larger when you consider all other things you can do with it. This makes me a lot more reluctant to part with money regardless of how I pay for it: I make the same mental calculations regardless of mode of payment. This happens almost subconsciously with me, I don’t really stop and think about it that long, I just have this idea about $X be too much to pay for one item and maybe OK for another one. Assuming I have the money, but as I’ve never ever considered buying anything for which I didn’t have the money, this has never been an issue. I look at stuff I can’t afford the same way I look for exhibits in a museum – interesting, pretty, but not a thing to buy.
“Do I have enough money for this” may be a good basic question for people with history of overspending. But having money isn’t the same as being able to afford, even having cash. I have enough money in my savings and investments to buy a Ferrari, but I still cannot afford to buy a Ferrari (even if I wanted to) simply because it costs an unacceptably high percentage of my savings and investments. These are a couple more questions to ask yourself, by the way: “what percentage of my savings this would take” and “what percentage of my free cash flow this would take” and “is this really worth it”.
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@AnneMarie – To be 100% honest, Courtney and I started using the envelope system using Dave Ramsey’s enevelope product. It comes with your Financial Peace University course we took a while ago. Though, I am really fond of @Steve & @Sandy’s suggestion above.
@Tyler – Like you, being aware of my responses to different types of spending is only one part of the equation. While I’m not quite to the point you are yet, I’m quickly getting there!
@Kevin – No, it wasn’t easy the first few times, but like anything it starts to just become a habit. It’s one I’m definitely glad I put in the effort to overcome the “hump.”
@RB – Yep, being honest with yourself. I love mental games like hiding your savings or creating artificial “brokeness” as you’ve pointed out. Isn’t it ironic that being honest with ourselves can lead us into tricking ourselves! Awesome & effective stuff.
@Sara – It’s awesome to hear the perspective of someone who IS able to still use credit card, but understands the process and installs questions to help control the spending. Going back over you “big bills” line by line sounds like a great way to verify that your system is working properly!
@Steve – In addition to grocery, “entertainment” is really the area that’s most benefited from the envelope system. For me it’s these categories that are easily justifiable that I struggled to control most.
@Tim – Wow that’s a huge purchase on a credit card! I hadn’t really thought about the temptation to want to pay it off over time, but it’s another great part of this equation. Even though you verified the purchase, your method of spending almost ended up costing you in a totally different way. Cool stuff!
@chiefcaba @hunter – Thanks for sharing another perspective. The key is to be aware of YOUR attachments, which it seems you are. If you’re able to treat credit & debit it the same that would be fantastic. I wasn’t able to though, when I was being honest. Also, I had the same feelings with cash until I psychically put them into envelopes. Carrying around loose bills (not specifically earmarked) is a surefire way to spend frivolously!
@kitty – You bring up a wealth of information about statistics. While I don’t think I have enough topic-specific knowledge to discuss the details, I will point out my favorite study of these effects:
http://74.125.95.132/search?q=cache:e68JxZrO1QYJ:www.apa.org/journals/releases/xap143213.pdf+%22effect+of+payment+coupling%22&cd=1&hl=en&ct=clnk&gl=us
Check this out if you have time. I’m interested to hear your thoughts on the benefits & disadvantages of a study like this.
In addition, I LOVE the extra questions you’ve provided. Depending on where a person is in there financially journey, these would offer a much more effective alternative. The “do I have enough money for this” effect was the specific question that helped me grasp my emotions towards different spending methods. I’m starting to get to the point where these other questions would be very helpful, as well.
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The “how much time did I have to work for this item” line becomes a bit ambiguous for salaried employees, or people who have taken money out of investments.
For example, say you work a variable 30-50 hours every week, and get paid a fixed $1000/week, of which you have 15% put into an ESPP (employee stock purchase plan) that cashes out with (variable) interest every six months.
At the end of the six month period, say your stock value has gone up by 25%. Given my ESPP, this means that you’ve worked somewhere between 780 and 1300 hours for a salary of $26,000, on top of which you’ve earned $1560 in ESPP interest.
If you cash out your ESPP and buy a $100 item, how many hours did you work for that? Oh, also you took two weeks of paid vacation in the middle of your six months.
Maybe you think this is pedantic, but it’s pretty similar to my actual situation, and I personally never consider the amount of time worked when contemplating the cost of something. Amount of time worked and amount of money earned feel almost entirely unrelated to me.
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Great article Baker. I can really appreciate the no CC point of view. I wrestled through that too and for about the first five years after being debt free I was a cash only guy (even tougher before there were debit cards).
However, my epiphany around finances and savings was when I got my head wrapped around the concept of the “opportunity cost” of money. For example, take eating out lunch everyday at work vs bringing a bag lunch. If the eat out lunch costs $6.50 and your bag lunch costs $3.00 to make at home you would save $3.50/day.
Doesn’t sound like much does it, and hey, I like eating out as much as the next guy so why not?! Well, here’s why not, consider if you take that $3.50/day, for 20 working days a month, for 30 years and save/invest it at 8%. Do you know what that $3.50/day will turn into – $99,233!!!! Almost ONE HUNDRED THOUSAND dollars!!
The opportunity cost of the $3.50 decision was not $3.50 but $100,000!!!!! I started playing this game with lots of decisions. Fortunately I started it early and as a result am able to retire many, many, many years before any of my peers with a very nice nest egg of opportunities waiting to be realized!
Now that’s what I call a financial epiphany! ; )
There is a great little calculator on the bankrate.com site called the Lunch Saving calculator. Use that to help you think through even little decisions (latte at Starbucks vs coffee at home) and it can change your spending life when you see how much future money you are throwing down the drain.
http://www.bankrate.com/calculators/savings/bring-lunch-savings-calculator.aspx
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I think I’ve always done this…. For some reason, I got lucky with the credit card/plastic conundrum. To me, it’s ALWAYS my money… Just not right now, but it sure will be! I use my credit cards to feel a bit safer, but also for rewards and to keep my spending in check. Yeah, I’m weird — Give me cash and I’ll be broke by tonight. Give me the same amount on a card, and I’ll hoard it until something *really* sparks my interest.
However, my husband can’t seem to use credit very well. Nothing against him, he just doesn’t seem to use it the same as I do. So I use my cards a lot, while he uses his for one or two things a month to keep it active. Definitely have to do different things, but each works best for us.
Also, great article! Just wanted to say I like your writing style, Baker.
It’s easy for me to relate to, which I really enjoy.
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About the envelope system… I recently started it, after moving into our new place, and you have no idea how wonderful it felt when, after finishing shopping with my husband for our groceries for the first week (we have a “FOOD+HOUSE” envelope), our total was $99.25… And we had $100 in our envelope.
That was thrilling, realising that you spent exactly what you were hoping to. That even though we bought some treats (chocolates, for instance) and some bulk items (8kg of rice, 4L of cleaning vinegar, 2kg of baking soda…), we didn’t go over our limit…
It took some adjustments, of course (we didn’t think to keep some money to buy more produce later during the week, and had to do without) but it feels so much better knowing where you stand…
I definitely recommend the envelope (or jars) method to anyone who wants to really control where they are spending. It’s an effort to first determine how much you need to put in each envelope, but it’s rewarding. And it’s a wake up call when you want to go out to grab a bag of chips or order pizza and you realise there is no money left, and that next time you need to think about it when you’re shopping.
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Frugal scholar- I have a major savings account as well- the question STILL is “Can I afford it?” for me. Now I balance things off of my desire for a great retirement lifestyle. Affording things today takes away from tomorrow.
GREAT article- best in the series!
Funny one after the one on getting credit cards to get miles for plane trips (I used to do that- then the airlines started deleting miles-I no longer play that game:>)
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I think the real challenge of most people is not only asking themselves this, but being honest. Too many times the impulse to buy is so strong the person is really a victim to it. Everyone should learn how to defend against the loads of advertising and information (read: You Need it now!!) being thrown at us every day.
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Great article – I accidentally discovered the same mental connection while making purchases. I am still paying off cc debts and changing to debit really helped me control my spending. After this initial success, I went one step ahead and tried all cash. This was extremely effective by creating barriers. Ramit Sethi on iwillteachyoutoberich(dot)com talks about creating these barriers to help control spending.
Consider this-Lets say I want to buy something at the local store. Scenario one – Hop on the car, go to the store, swipe my cc and end up with $1000 cc bill at end of the month for many such purchases. Scenario two – Look for enough cash at home, if not enough hop on the car make a pit stop at ATM, withdraw enough cash, go to the store total spent at end of month $400.
Creating these barriers has really worked for me and will work for anyone trying to curb expenditures. I still use plastic with “credit” written on it but I limit the use to purchases made while traveling and online (haven’t figured out a better way to pay online). Will be interested in finding out a better way to make online purchases.
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@Tyler #32 – I’m salaried, but it’s not rocket science to do the math to figure out the hourly equivalent if I work a 40-hour week. I don’t work a 40-hour week; this week was 68 hours, but I believe in KISS (keep it simple, stupid).
Of course, if you really want to make it complicated, then you can calculate the hourly amount after tax. However, I don’t believe money should be complex. If you keep it simple, it’s easier to get a handle on it and it can even be fun.
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This was a great article. I really enjoyed it! Hire this man!
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@Melissa # 10 – how about using the libary and borrow books?
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@Tyler #32: your example is a good $20/h net.
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GREAT post! I have gone back and forth deciding if the envelope method is for me….but your story about the grocery store sounds like a painful lesson that would be REALLY good for me to experience.
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I also like the comment, “I can’t afford to buy every good deal.” A similar mantra I use is “My house isn’t a museum,” meaning I don’t have to own everything cool.
On the other hand, asking myself, “Do I really need this” wouldn’t work for me at all. All I really need is air (thank goodness, freely available everywhere), water (also, since I like tap water and live in a city, freely available everywhere), food (not all food, just nutritious food), and protection (I need shade in the summer, cover during a hailstorm, etc.) I’d hardly ever get to buy anything!
Asking myself whether I can afford something doesn’t work for me, either. I can afford just about anything I want. But I can’t afford everything I want. Ask myself if this is something I’ve really been wanting for a long time is good.
Giving myself specific limits and (lower) targets on what I can spend monthly also helps, but these days my best strategy is to think whether, for any purchase I’m thinking of making, what is it I want, and is there a better way to get that. Most of my current financial focus is on researching more options on how to get what I want. I’m especially deficient in knowing how to fix and maintain the things I already have so I don’t have to re-buy them later.
Another thing that helps me is to have specific plans on things to do all day so I don’t think to myself that I need to get out of the house and then walk to a nearby store when, for example, I’ve told myself I’m not buying any more clothes until I lose ten more pounds.
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this is something that most of us must learn. dealing with spending habits that is out of our range. it’s just as easy as to remember first what is your basic needs and sticking on your budget. we dont need to spend on something that we can live without.
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Great post Adam!
Thoroughly enjoyed!
Best line: This was truly a “holy crap” moment in my life. My first response with debit was to verify my purchase instead of simply validating it.
Dave
LifeExcursion
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J.D., comment #27 is great and I’d love to see a whole article about this from someone well-versed in statistics.
-Erica
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@Baker @ ManVsDebt (31) – regarding your questions about the particular article about studies.
It’s interesting, but all of the studies have the following limitations:
1. They uses students, i.e. not a very mature segment of population and also the most broke one
2. They rely on models or estimates and questionnaires – the most unreliable method. None of the studies use actual purchasing habits with real credit cards and the real spending, they are all questionnaires or estimates or experiments with tiny gift cards.
3. Some experiments had a very small number of people – 30 people in one study. When you have such a small number of people, you can get a different result by having just 2 of them answer differently i.e. the differences can be due to chance.
Looking at details — I don’t have much time to read details, it’s just from a quick scan:
Study 1: questionnaire. None of the questions address the issue of paying in full vs carrying balance.
There are, however, some interesting results. Look at one of the most important questions and the one authors pay a lot of attention to “I tend to use my card without thinking of the amount” on the scale of 1 to 7 with 7 where 1 is “not at all” and 7 is “very”. The mean reply to this question is 3.77 which is only slightly positive. Even more interesting to the question of individuals vs averages is the standard deviation i.e. the measure of variability of answers. It is 1.83 meaning that most answers (about 68%) were between 1.94 and 5.6 and remaining answers were outside of this range. In case you are wondering about fraction – if they calculated 68% of answers they probably got less or more that a person…
In the summary and discussion of Study 1 the authors correlated the answer to the question above with the answers to the question of willingness to pay more with credit card and concluded that they did correlate. But this is obvious – people who don’t think what they are spending with credit cards are probably those that spend more with cards. There is nothing, however, in Study 1 that would allow you to conclude that every credit card user doesn’t think about how much he or she spends… In fact, given the only slightly positive answer to the question about thinking about the amount and the large variability of answers, you can see that a large percentage of participants answered that they do think about the how much they spend even with credit cards.
Study 2 — very small number of people, again all students.
One interesting thing about this study is that it shows that whether or not credit card users spend than cash users depended on the strategy used to estimate total expense: $175.16 with CC vs $145.56 cash with the strategy of just looking at items and coming with ballpark figure but $134.00 CC vs $163 cash using the estimation strategy that involved estimates of individual item’s cost and adding up. The authors thought that the latter strategy made participants more aware of the cost and possible future pain of paying.
I’d guess – and this is just an opinion – is that people who always pay balances in full are indeed those who are more aware of future pain of parting with a large amount of money than those who carry balances, so our strategy would be similar to that in the experiment which showed less spending with a CC.
Study 3 – gift certificate vs cash. Without going into much details, I’d venture to say that gift certificate isn’t the same as credit cards: you dont’ get a bill at the end of the month for using scrip. But… again we have a very small number of people 12 males and 18 females, some overlap in results (looks at SD numbers — in cases like soup standard deviation was very high)
Study 4 – very small amount of mone – $1 gift certificate vs $1 cash. Also, as the authors themselves said that one explanation of willing to spend $1 gift certificate more than cash is that you have to take the gift certificate out of the wallet to get cash, you cannot just keep it.
In summary – this is an interesting study, but the only thing they show is that students who don’t think about how much money they spend when they use cards tend to spend more and that there are slightly more people like this. If anything, the study showed that people who think about future pain of the expense when they use cards don’t spend more. There was no mention specifically of the issue of carrying balances vs paying in full, but I’d imagine those who pay balances in full do anticipate future pain of parting with a large amount of money at once….
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@Debbie (44) ” I’ve told myself I’m not buying any more clothes until I lose ten more pounds.”
Just noticed this phrase. This is what I do too, though to me it’s often just a few pounds or not fitting into size 5. Right now, for example, I don’t want to buy size 8 out of principle, but I can no longer fit in size 5 so I end up not buying anything. I did lose a larger number of pounds in the past – 18, but I have recently gained 6 pounds and am desperate to lose them. I am not even doing this to reduce spending – I am not in debt, and I am actually fairly comfortable financially so I don’t have real need to reduce spending – but simply because I hate trying something and finding it doesn’t fit. I also like clothes that show off my figure and if there is nothing to show off… I still go to stores though: looking at something that I’d like but that is too small or just doesn’t look good on me gives me an incentive to lose more weight. I say to myself – I’ll look at it again after I lose weight… Haven’t helped much though – I’ve been doing it since the start of summer and still haven’t lost weight.
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@Mona, #41
I don’t use the library because it’s a hassle to have a set amount of time to read a book and then have to give it back. And that’s if they even have the book I want in the first place. I love to re-read my books, so I feel it’s worth it to buy them. Plus I never know until right that minute what book I want to read.
All that being said, I do plan to renew my library card and try to use it now and then, if only for books I don’t want to spend money on. There are several personal finance books I’d like to read, but not enough to pay for them. I’ve checked my library’s online catalogue and they have them, so I’ll check them out to read them. There is also a book I’ve been waiting for from a favorite author, the last book in a series. However, it is getting ABOMINABLE reviews from her other fans!! So I think I’ll wait to get that from the library to see if it’s as bad as they say. (Because no matter what, I have to read it anyway!:) ) Maybe once I get back into using a library (used to use it in high school quite a bit) I’ll be able to save on books too!
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