A large component of the work I do with individuals is to gain a clear understanding of their relationship and understanding of money. There is an increasing body of study that looks at the link between how we perceive money and worth and the reality of wealth. Over the next few entries I want to touch on six issues of Behavioral Finance that may be impacting your understanding of money and hindering your financial success. These points are far from the only psychology of money issues, and they are not universal, but they are fairly common issues that most folks will see in their financial life.
Layer it on thick
It seems that most large retailers have some sort of credit card and the vast majority of stores take plastic. If asked I am sure that these stores would say that it is for customer convenience, but there is another reason that retailers accept these proxies for money: the “layering” effect. It is the same reason casinos use chips for gambling. The further the proxy for money is away from “real” money the more psychological distance we feel from the act of spending. Casinos have learned to take advantage of this psych-out. If we laid ten and twenty-dollar bills down on the craps (or roulette, or poker) table it would have a much greater impact in our heads. We see bills and coins as potential items for our life. When we see things that represent food, fuel, and shelter scooped up by the blackjack dealer it scares us a bit. However, colorful plastic chips do not have the same impact, so no money on the table means customers are more willing to part with these plastic proxies for rent money.
You don’t gamble? I bet you still use plenty of proxies for cash. Paying for that Venti Mocha with a Starbucks gift card just doesn’t hurt quite the same way as handing over a fiver. For the real whammy we can now combine online bill pay services with our credit cards. Our employer deposits our earnings directly into a bank account. We then buy a new TV with our Visa card and do not see the bill for a few weeks. When the charge shows up on the credit card statement (delivered electronically) we direct the bank to pay the bill via on-line bill pay. Each layer between cash in our pocket and the purchase makes the loss of the cash a bit more comfortable, and the sale a little easier.
It would be difficult to give up the electronic money world, but this proxy effect can lead us to make poor money decisions. So try to give up the electronics for just one month. For one month convert your paychecks to cash for just a bit so you can see it and feel it. Then, for the whole month pay as many things as possible with cash and use checks for the rest. Odds are your landlord or mortgage company will insist on checks, but your supermarket, gas station, and local Starbucks will be perfectly happy with taking cash. Keep track of where and how you spend your cash. At the end of the month you will be shocked at where you spend your money, and will have found several ways to spend less.