Your Irrational Financial Behaviors, Unmasked

by moderndomestic on November 24, 2008

Pretty Money

Money - surprisingly difficult to spend (rationally).

Photo courtesy of richseattle via flickr.

Despite all the finance articles that lay out the science of investing in a dry and logical manner, personal spending remains an emotional and messy fair.

A number of books have hit the market recently, which explain how, when it comes to money, people throw logic out the window. Instead, they rely on irrational “hunches” that make little sense.

Witness books like Predictably Irrational, which is an in-depth study of how your spending is based on unconscious urges that have little to do with your best financial interests. The Paradox of Choice, another book in the field of behavioral economics, delves deep into the rather idiotic psychology of your spending decisions, explaining, for instance, why a $45 bottle of wine seems like a deal if it’s the second-cheapest bottle on a wine list, but not if it’s the most expensive.

Books like these have become even more timely in light of the recession, which is like one giant laboratory experiment on how, when it comes to money, our choices just don’t make a whole lot of sense.

The New York Times published an article last week that is all about how our spending choices don’t exactly stand up to the harsh light of day. Times reporter Penelope Green interviews a bunch of consumers, eager to cut back on their spending, but going about it in a way that doesn’t actually save them any dough. One woman in the article valiantly gives up the $15 tomato soup that she buys each week, only to splurge on $500 dog beds. Another woman switches grocery stores to get cheaper cauliflower, only to pick up items that she could have found cheaper in another store.

Are your cheeks burning right about now? Because mine are. I’ve definitely done all or more of the things described in this article — cut back in one area, only to spend much more in another, gone to the “cheaper” grocery store and then picked up a bunch of items that were cheaper in another store, given up small luxuries only to turn around and indulge in one big purchase.

Given that many of us are trying to really trim our household budgets, how exactly do you save money? Or are we all just doomed to be virtuous at one store, and then cancel it out with a spree in another?

I actually took a class last winter that delved into these issues, where we read the book Your Money or Your Life, and I learned a simple way to figure out what you’re spending. It’s a foolproof method that’s guaranteed to expose the areas where you may be spending more or less on a regular basis.

Write down everything you spend. Whether it’s in a spreadsheet or in a notebook, writing down everything that you spend, from a $1 cup of coffee to a $1000 mattress, is going to force you to face the reality of where exactly your money is going. While my documentation of my spending habits has waxed and waned since the class has ended, I’ve found that it’s much, much more difficult to fool myself into false economies when I’m keeping track of everything.

But, of course, that’s just one way to try to fight the tide of irrational urges that guide a lot of people’s spending. There are, I’m sure, many other methods that don’t involve spreadsheets. And you can bet that in the next six months, as the economy continues to wither, we will hear about every possible system in the personal finance columns in our nation’s newspapers.

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