There is a real danger in how people rationalize expenses.
I once heard a story that almost brought me to tears. This friend of a friend had close to $80,000 in student loans. Although that’s sizable, I had no interest in casting judgment until I was given the second piece of information – he recently purchased a $12,000 engagement ring for his fiance. The reason?
….I’m already in 80k worth of debt, what’s another 12k?
It’s a sad scene, but it did give me a laugh. It reminded me of a Simpson’s episode. After digging a deep hole without an exit strategy, Otto asks how they’re going to get out to which Homer exclaims, “We’ll DIG our way out!”
Back on track, people often take a known condition, establish it as the comparison benchmark, and then base all future decisions on that reference. In the example story, the ring price was compared to the overall debt obligations. Removed from that relationship, reassigning the context paints a very different picture.
Say he needed a ring and car at the same time. Spending the same amount on a ring as you would for an entry-level sedan seems exorbitant. Point being, the $12k spent is still $12k no matter how you look at it. The money is not of any less value simply because you’re spending more of it elsewhere.
Now let’s look at another example of this – cell phone plans. Carriers smartly marketed their add-ons by compartmentalizing them. In relationship to the primary plans, these features seem negligible in cost. Assuming you’re plan costs $60/month, what’s a measly $5/month for texting? When that rationale is compounded, you could end up with a plan costing $100/month, roughly 70% more than you probably originally intended.
Now there’s a new marketing tactic which takes the opposite approach. Because carriers are so generous, they’ve decided to offer us a “complete” package for an easy $100/month. Problem solved right?
Not exactly, unless your usage exceeds the cost (i.e. separately your plan would cost more). Otherwise, you are under-utilizing your plan. Your primary plan costs $60/month and you have $20/month worth of add-ons. You never exceed the limits, but decide to opt into an “all-inclusive”plan for convenience. Now you’re paying $100/month for the same services, or a 25% premium.
Both of these cases are good examples of inefficient systems. As I’ve summarized before, EngineerYourFinances will be looking at how you can OPTIMIZE your own financial system and work towards that ultimate pie in the sky – FINANCIAL SECURITY.
Along the same lines, I read a book a while back that talked about this same topic. Ronald Wilcox’s book, Whatever Happened to Thrift, addresses this notion in Chapter 3: Psychology of Money. An overall quick and entertaining read, that specific chapter focuses on a lot of the self-imposed expectations that end up hurting us financially.
To recap, our method for justifying purchases generally leads us to spending either:
a.) more money than we originally intended, or
b.) additional money that we hadn’t originally anticipated.
So try it out!
Next time you’re making a purchase plus accessories, take a step back and ask yourself if you are buying the accessories because of a true need or if you are rationalizing it against your primary purchase.
If you can say that you would by this item separately by itself – then go ahead and get it. If you can’t, think twice about it.
Remember, $1 is still $1 whether you spend a few of them or hundreds of them.
Photo by Avelino Maestas
I had a college buddy who did this. He and his new wife had college loans of over $100k and they also bought a house right after college so combined they had over quarter a million in debt.
He said to me: “debt is a way of life and I’m just getting used to it.” It seems when people have that much debt they simply give up and keep digging since they don’t see much hope. He’ll be in debt forever, especially with that mentality.
Wow. Its amazing how wide the difference between (or is it among?) our peers is. The defeatist mentality of your friend only further solidifies this “everyone has debt” and “everyone needs debt” mentality.
Hopefully he and his wife chose professions with prestige. If they’re both pottery majors, then I REALLY feel bad for them.
Hi Ryan,
Your friend, like anyone who has a major, daunting task ahead (renovating an entire house instead of one room, losing weight the equivalent of another person)has to be overwhelmed and it’s much easier to go along with the program and convince yourself that EVERYBODY is doing this. But what I’m seeing on this site is espousing steps that would tackle one issue at a time–steps that primarily would stop you from getting into that situation to start with and that would help you crawl out of the hole–but it’s all ONE STEP AT A TIME. As someone who has paid off three mortgages early, including a set of years during when my husband received 1/2 pay disability and I was working only part-time, I can tell you that paying extra on these big bills each month can make a HUGE difference in what you pay in interest in the end and how soon they are paid off! But, of course, just like the person who needs to lose weight, if there’s no interest in doing it, NOTHING will change and life will go on as it is.
Great comments. The challenge with any goal is persistence, and without the right mindset, those goals will never be achieved. You highlight the most commonly overlooked trick in the book – break it down! As a side hobby, I really enjoy running because it helps me focus in so many other aspects of my life. My next race is a 10-miler, and when I first looked at the whole distance, I thought GEEZ this is going to SUCK. But, by breaking it down and taking it in smaller chunks, I’m now shooting for a sub-80 time (8:00/mile or less).
You’ve employed a little ELBOW C (my new phrase for your comment) – Every Little Bit Of Work COUNTS.
I hate talking to the sales people in person or over the phone because they try to talk you into buying all the extras, whereas online I can see what I’m getting in the cart and debate the need for any extras.
You can rationalize any purchase if it’s something you really want, which is why we should avoid impulse buys and use a cooling off period to make sure we really want it.
Site looks good, I’m looking forward to more good stuff from you.
David, visually your cart is a great method to get a “forest” outlook on your purchases. Plus, you NEVER pay full price when you buy online with great sites like:
retailmenot.com &
couponcabin.com
I had planned to write a post about this, but let me give you a teaser. I recently purchased $180 of running gear for under $90 and over $400 in software for under $100. Makes you wonder though, how much is this stuff really worth?
He has a point though.. what’s another 12K when you already got 80K! :)
The question I’ve asked before is “Does Bernie Madoff Win In The End?” Essentially, is Bernie the smart one who figured out how to liv beyond his wildest dreams? At 70-something, he’s almost dead, so who cares if he’s in jail!
.-= Financial Samurai´s last blog ..We Have Peanut Butter, But No Bread – Making Do With Less =-.
@ FS
Start with 80, add 12, and hop on the downward spiral.
Did you see this article about the doctor who let her debt balloon to some $550,000+???
She’s a Bernie-winner because who wants to guess some hungry law firms are going to scope her up as a victim, wipe the debt clean, and get a ton of publicity.