3646: Why Smart People Make Bad Spending Decisions by Ornella Grosz with Budgets Are Sexy on Financial Decision-Making

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[00:00:53] This is Optimal Finance Daily, Why Smart People Make Bad Spending Decisions by Ornella Grosz with BudgetsAreSexy.com. And I'm your narrator, Justin Malek, the guy that reads blogs or articles to you every single day of the year, including weekends and holidays. And I appreciate you listening every single day. It really means a lot. We're going to get right to it as we optimize your life.

[00:01:20] Why smart people make bad spending decisions by Ornella Gross with BudgetsAreSexy.com. Why is it that sometimes budgets don't work? I think it's because many of us set them up and never look at them again. We never evaluate them and see how we are affecting our overall financial health. And even if we do, our life takes over and we succumb to temporary amnesia.

[00:01:48] Without realizing it, here are a few reasons why smart people make bad spending decisions. Number one, not treating all dollars with the same value. Here's an example. A $100 bill under your mattress should constitute the same wealth as $100 in the bank, $100 of gambling winnings, or $100 tax refund.

[00:02:14] Let's say you and your friends take a trip to Las Vegas and decide you will not lose more than $200 on gambling. The good thing is, you are giving yourself a limit. But let's pretend you lose $100 in the end. Now let's say you go home and realize your bank just charged you $100 in fees. Here's the question. Do you feel more upset about losing $100 with gambling or $100 in bank fees?

[00:02:44] I bet most people would be more upset with the bank charging you $100 in fees versus you losing $100 gambling. Why? Is it because one loss was expected over the other? Mr. Benjamin should have the same value and significance to you. It should be the same way if you won $100 from gambling winnings or received $100 more in your monthly salary.

[00:03:09] Every financial decision should be made based on its effect on your overall financial wealth. If only it were that easy. We are not robots and computers to constantly calculate every transaction against every financial goal or need. It would be a daunting task since given the fact we are all emotional creatures. Accounting money for different purposes has its benefits and drawbacks.

[00:03:37] The drawback is that the gambling loss was already accounted for. It was expected. Whereas the bank fees were not. The benefit to accounting money or mental accounting is that we set money aside to make sure we have money for the bills, retirement, savings, and so on. Number two. A dollar here and a dollar there equals real money. Take a look at these two scenarios. Scenario one.

[00:04:07] Imagine that you go to a department store to buy a work shirt. It sells for $50. However, while at the store, you learn from your phone that the same work shirt sells for $25 at another store 10 minutes away. Do you go to the other store to make the purchase to get the lower price? And scenario two. Imagine that you go to a furniture store to buy a new bed set which sells for $1,950.

[00:04:35] However, while at the store, you learn from your phone that the same bed set sells for $1,925 at another store 10 minutes away. Do you go to the other store to make the purchase to get the lower price? I bet most people would drive to the other store to save $25 in the first scenario but not in the second scenario. Again, I ask, why? Why?

[00:05:02] Saving $25 should have the same value regardless of the size of the transaction. And number three. Sales and discounts. Imagine two friends. Anne and Evelyn. Anne said to Evelyn, Oh look, the store is having a sale. Evelyn responded, Let's go check it out. And off they went, only to leave the store with two extra bags in their hands.

[00:05:28] And yet, these are the same two people who say they don't have enough money to save. I've known people similar to Anne and Evelyn. This is known as impulse buying, which typically involves the use of a plastic card rather than cash. A sale and discount doesn't necessarily mean you are saving money. I can understand you buying more things with a specific dollar amount, but it doesn't mean you're saving.

[00:05:55] The point of sales and discounts is for the store to have the opportunity to get rid of their inventory. To hurry up the process, the store advertises the sales and discounts to reduce the prices so you can buy more things. Here are a few solutions to keep in mind, aside from setting up a budget. Number one, treat every dollar the same, no matter the size of the transaction.

[00:06:20] When making a big purchase, would you pay an extra $1,800 for a navigation system in your current car? If not, then don't tack on the extra expense when buying a new car. Number two, automatically funnel money to your savings and retirement account. It's easier to put money to the side automatically than to write a check or manually make a transfer. Number three, pay with cash until you are able to control your spending.

[00:06:50] Ask yourself if you would pay for a particular item if you were paying cash rather than using your plastic card. Your answer might be that you would pay less or not even make the purchase. And number four, treat all income as earned income. No matter if it's bonuses, tax refunds, inheritances, or gifts, hold on to the money for a few months before making any spending decisions.

[00:07:18] In the interim, park the money in your savings account. When the time is up, you will view this money as savings and your decision-making process will adjust. You just listened to the post titled, Why Smart People Make Bad Spending Decisions by Ornella Gross with BudgetsAreSexy.com. And I'll be right back with my commentary.

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[00:09:30] The one that got me was that we don't treat all dollars the same. Losing $100 gambling stings less than a surprise $100 bank fee, even though it's the exact same $100. And the shirt example is so true. We'll drive across town to save 25 bucks on a $50 shirt, but not to save that same 25 on a $2,000 bed. I've definitely done that. What ties these together, I think,

[00:10:00] is that our brains judge money in relative terms and by category, instead of just asking what a dollar is actually worth. And this connects to something I've mentioned on Optimal Living Daily. I grew up learning to question everything, which I credit to my family. And that habit is exactly what helps here. Just pausing to ask, would I make this same call if the numbers were flipped?

[00:10:27] At the same time, the goal isn't to become a robot pricing out every purchase that's exhausting and no fun. It's more about catching the biggest traps, like the impulse sale. And I liked her tip to treat all income the same. A tax refund or a bonus is just as real as your paycheck. So maybe today, notice one spending decision where you're treating some dollars as less real than others.

[00:10:55] Thank you to Ornella for this one. Thank you for being here. Have a great rest of your day and I'll see you tomorrow, where your optimal life awaits.