Learning to let go (a trap for frugal people)
One of the most annoying psychological traps out there is a tendency to double down on decisions that aren’t working out. It feels bad in the moment, it feels worse in retrospect, and it drives our friends nuts.
Regina George in the film Mean Girls delivers the iconic line “Stop trying to make ‘fetch’ happen.”
The desire to “make it work” because we’ve already put in so much has us wasting our time energy and goodwill on people, jobs and other organisations that do not deserve it and throwing good money after bad.
Ever read a story about a six-month-marriage where one partner only went ahead because the big expensive wedding was all arranged? Cringe! Yet it happens. Why? Because “We’ve come so far we can’t back out now.”
Yes, yes you can!
This phenomenon is the sunk cost fallacy. A cost you can never get back is a sunk cost (all time wasted is a sunk cost). The sunk cost fallacy is when we make the sunk costs a factor in our future decisions, instead of purely looking at the future costs and benefits. The sunk cost is irrelevant, what’s gone is gone.
Some reasons why we end up falling for the sunk cost fallacy:
Pride - we try to style it out - “No, I love my (expensive but impractical) marble kitchen work surface! Sorry, please don’t put the turmeric down there… or there…”;
A sense of responsibility - “Others have put their trust in me, they will feel bad if we don’t finish what we started”;
We look at what we’re getting compared to what we paid, when we should just ask “what is this worth to me now?” This happens a lot in investing, people resist selling underperforming shares because they don’t like having made a lost compared to the purchase price.
Over-optimism bias - “We can make this work!”
Hatred of waste - to cut our losses is to admit we have made a wasteful decision.
If you’re a frugal type, that last one is the killer. It’s easy to keep doing something inconvenient, boring, tiresome etc because you don’t want to have wasted your money and efforts so far. Realising that you’re better off admitting to the waste and finding ways to avoid it in future is a huge relief but it can be an emotional struggle to get there.
One way to get around the sunk cost fallacy is to imagine someone else had paid the cost. We can ask ourselves, “What would I say to a friend who was in this position?” (Honestly, this is in the top three clarifying questions of all time.)
I’m deeply grateful to my late great aunt Sonia (great as in “fantastic” as well as in “my mother’s aunt”). When my sister and I were in our early teens she took us out to a West End play. We stood up at the interval and she turned to us. “Well, that was boring,” she said, “Let’s go for dinner.”
So we did.
We didn’t stay because “otherwise we’d waste the cost of the tickets” that money was already wasted. We left because staying would also waste the rest of the evening.
Now I always walk out of boring entertainments, and I always raise a mental glass to Auntie Sonia as I do. I encourage you to do the same.
We also did an episode of Squanderlust on the sunk cost fallacy.
No regrets! Using cognitive bias to achieve your goals
One of the most famous ways human beings are fundamentally irrational is our reaction to the possibility of regretting a decision. We really hate the idea that we might have future regrets. So much so that shops only have to put up a “sale” sign or mark something “limited edition” and we rush to buy in case the items we want become unavailable. Never mind that these items are often extremely generic and easily found elsewhere, or soon to be out of fashion and abandoned. Yes, I am speaking from experience.
So, regret aversion, as this phenomenon is called, has a bad name in the personal finance community. We’re encouraged to step away from the sale goods and give ourselves 24 hours to reconsider whether there’ll really never be another reasonably priced plain white t-shirt or if we’d actually find life meaningless without an avocado slicer like the one that influencer uses. (What even happened to avocados? Are they still a thing? I’m too old to know.)
I think, however, there are ways to make regret aversion work for you. Don’t get me wrong, it’s possible to make many silly choices from trying to avoid the possibility of regret. It’s a major cause of procrastination as we try to reconcile mutually exclusive options. Done right though, regret aversion can be harnessed to help us get motivated in the face of fear, self-doubt, boredom, frustration and plain old slog.
I have an image on the desktop of my computer that says “Turn ‘I could have’ into ‘I did’”. It’s there to remind me that I don’t want to look back on my life with regret. I don’t want to say “I had these gifts and opportunities and I didn’t use them”.
You can use this method for all sorts of goals including financial ones. Tell yourself “It might suck giving up my time to budget and meal plan, but if I can’t afford to spoil my partner on our anniversary, that’s going to suck even more”. Or perhaps, “I might feel uncomfortable negotiating my salary, but I’ll regret feeling I could have earned enough to save a deposit for my own home”. Or even, “It may feel awkward to ask the adviser to explain my pension to me yet again, but I don’t want to get to retirement and find I’ll be living on beans on toast instead of ”.
This is why it’s important to be really clear about your goals. The more you can visualise what you’re working towards, the more you can use the potential regret of not getting it to motivate you.
Exercise:
Imagine one of your personal goals very clearly, something you think you could do, with a bit of effort. Go on. I’ll wait.
Now picture the regret you would feel if you didn’t do everything you could to achieve it.
It feels horrible right? So, what can you do to make sure you never feel that way? What steps can you take towards that goal?
Comment below, what do you not want to regret?
Taking advantage of life changes to improve your money habits
A small change in your routine can mean big changes in how you spend and save money. We carry out so many of our habits on autopilot or near enough, that sometimes we miss opportunities to improve our lives. Anything that disrupts our habits can be a great way to create mindfulness and allow us to reset our behaviour in ways that benefit us.
As you may know, my husband and I moved house just over a month ago. It was a horrible, stressful process but we’re very happy in our new home. One side-effect of the move is that we no longer live opposite our local corner shop. This is the corner shop where I get my chocolate. Sorry, this was where I used to get my chocolate. The nearest corner shops are now at least five minutes walk away. Now I think twice before going to buy chocolate. The extra few minutes walk means I have to want the chocolate more before I‘ll be bothered to go and get it. This is what is known in behavioural science as friction. In this case, this friction is going to be good for my blood sugar and also my wallet, because I have expensive taste in chocolate. It doesn’t have to stop me altogether, even a 50% drop in trips to the shop will make a difference given time.
Friction can work for you or against you. We’ve also moved further away from the gym and I can’t see myself restarting my membership because I know the extra distance means I’m much less likely to go. Since I’m getting a surprising amount of physical activity sorting out our new garden, I’m not so worried about that. (Also yay! More money saving!)
These are changes that happened naturally as part of the move, but this change is also a chance to reassess our day-to-day lives and find opportunities for intentional improvements. For example, we’ve reconsidered which bank account we use to pay our bills. We’ve set up joint savings for the work we’ll need to do on the house. We’re planning our finances more as a household than as two individuals who happen to be married and live together.
It’s no surprise that all the research says that big life events are the time when people often seek financial advice or coaching for the first time. Getting married; buying a home; giving birth or adopting; and approaching retirement are all big changes with obvious financial implications. As are the less happy life events, such as divorce, bereavement and sickness. Yet many people would be better prepared for these big events, both happy and sad, if they’d got advice or coaching some years before.
Similarly, waiting for a big event before you evaluate your habits is a mug’s game. You’re really just procrastinating. Instead, set a date with yourself to go through your finances regularly and while you’re at it consider your daily life and see if you can find a way to tweak a routine or habit for the better.
Would you save money if you:
Walked a different route and avoided a tempting shop;
Tried a different supermarket or avoided a certain aisle during your usual shop;
Unsubscribed from a mailing list (or twenty);
Changed your evening routine, so you’re not browsing while you’re tired and your defences are down;
Unfollowed certain social accounts;
Made more proactive choices about how you spend your free time, so you feel more fulfilled and connected, and are less prone to emotional spending;
Found a way to reduce friction for your good habits, like automating payments to savings and investments on the day you get paid or using an app with a round-up function;
Considered the big events that could be coming in your life and started working out what you’d need to make sure your finances were in the best shape possible if/when they happen.
I have another blog post about why it’s important to use friction to help you do the right thing and also a podcast episode with the science behind why we shouldn’t rely on willpower, so it’s better to design your life to avoid temptation.
What have you done to help you reinforce good habits and avoid troublesome ones?
Need the willpower to stop overspending? Cut out scratchy clothes labels
Have you ever got up in the morning with the best frugal intentions, then by night time you find yourself looking at an order confirmation email wondering how you ended up browsing for window boxes or signature scents in the first place?
You have just been caught out by ego depletion and you are not alone. Ego depletion is the term for the way your willpower gets drained through the day by the effort it takes to meet the challenges we face. Every time we face a challenge or temptation we have to decide whether to take the option with the best long term outcome or the one with immediate rewards and these are often not the same option. research ahs indicated that willpower is like a muscle and as you use it through the day, it gets tired.
Basically, you can only be patient, tolerant and self-denying for so long before you run out of willpower and do something that feels good in the moment and damn the consequences. That might be snapping at a co-worker, eating a grab bag of Hula Hoops or treating yourself to some fancy new underpants from that store that always emails you.
Let’s face it life sucks sometimes and growing more willpower just because we want to isn’t really an option, so how can we make the best use of the willpower we have?
Get rid of minor irritants
Wherever possible:
Cut out scratchy labels and donate or sell stiff, itchy or tight clothing and shoes that pinch;
Learn about your devices’ settings so you can customise them for your personal preferences;
If there are tools or pieces of equipment you use often, make sure it’s the best quality you can afford, so you’re not frustrated by bad design or shoddy construction;
Ask colleagues, family members, friends and neighbours to change habits they may have that annoy you, it’s possible to have these conversations tactfully and still ask clearly for what you want;
Consider noise-cancelling headphones for times when you need to focus;
Keep your environment at a comfortable temperature, clean, pleasant smelling and uncluttered.
Generally pay attention to low-level irritants that drain your willpower without you even really noticing. The more of these you’re putting up with, the less willpower you have for making positive choices when faced with temptations.
Look after your health
Physical and mental discomfort from poor health is something that drains willpower
Do what you can to get enough sleep;
Eat well so you’re not hungry, sugar-crashing or suffering from indigestion.;
Move your body and stretch often, so you don’t end up stiff and cramped;
Ensure your work environment is as well-designed and ergonomic as possible, so you’re not straining to complete tasks;
Don’t overdo the screen time and stay away from social media drama;
Find ways to relax, ideally somewhere quiet in nature, and take a few deep breaths.
Treat yourself (in moderation)
Pre-emptively doing small, nice things for yourself will help you to replenish your willpower and avoid the need to vent, binge or splurge. This is why no spending plan should completely exclude treats. You know what treats look like for you, make sure you have a supply to keep you going, so you don’t feel deprived.
Celebrate your wins (including times when you successfully exercise willpower). Giving yourself a pat on the back is an immediate reward and takes the edge off the pain of delaying gratification.
Finally, forgive yourself. If you are fighting the willpower war on too many fronts and lose a particular battle, don’t get too down. Instead think whether you’d be better served easing up on one or two areas and focusing your efforts elsewhere. Nobody’s perfect and a constant feeling of failure is a drag on willpower too. If your focus is your finances, just keep everything else ticking over for now. Once you’ have your money in better shape, you can choose a new goal elsewhere.
If you want to hear more about ego depletion and the science behind it, listen to this episode of my podcast Squanderlust: Episode 3. Willpower Outage.
Understanding the poppadom effect
Who loves poppadoms? I know I do. Crunchy savoury appetisers are my favourites.
You know who else loves poppadums? (Or olives or prawn crackers or bread baskets or whatever…)
Restaurants. You know why?
Because they cost almost nothing compared to the sale price and almost everyone orders them, even customers who intended not to.
In fact, we quite often order little extras we hadn’t meant to buy. Going to the till with a new sweater we see some earrings that would go with it and think we might as well have them. We get a screen protector to go with our new phone. We buy the upgrade, the insurance, the add-on.
Why?
The poppadum effect.
Once you’re already paying for a whole meal, the cost of poppadoms seems trivial in comparison, so why not? The poppadum effect is a type of mental accounting; a way our brains trick us into making unwise decisions by using a cognitive shortcut that doesn’t take us where we really need it to go.
Once you’re committed to purchasing a new tablet (say), adding the cost of a case seems negligible. Shops know this and they play on it. Salespeople are trained to offer the extras after you’ve decided to buy and there are always tempting small items at the till.
The truth is these little extras are often the poorest value for money in the store and if we were thinking clearly, we wouldn’t have bought them at all, but in the moment of purchase we’ve already overcome the resistance to spending and the part of us that always wants more can take its chance and add to basket.
Being aware that this is a common phenomenon can help you make better decisions. I, for example, will always want poppadums, but only one, thank you.
Take a minute when a shop offers you an extra or an add-on and remember you almost certainly don’t need to make a decision about it straight away. Say you’ll think it over, because nine times out of ten you can come back for it. You might even get a discount.
I did a podcast episode on our weird irrational responses to prices. You can listen here.