TAM Book Club: Dollars and Sense by Dan Ariely and Jeff Kreisler
Dollars and Sense teaches you about all the ways that you irrationally think about money and gives you tips and tricks on how to improve your own money management.
I have been a fan of Dan Ariely since I was introduced to the field of behavioral economics. As a financial capability expert who originally majored in psychology, I will confess that at first I didn’t “get” the hype around behavioral economics. As in, I thought it was common sense because I saw people acting irrationally with their money every day. It wasn’t until I asked my dad, a trained economist, about this subset of the field of economics and he replied, “Well, people act wrong with their money.” That’s when I got the importance of this field of study because yes, sometimes people act “wrong” with their money, and many times they do that for the “right” reasons.
For those of you who are familiar with Dan Ariely you will notice that many of the experiments that he describes in the first section of this book are ones that he references in his other books as well. It was fun to have co-author Jeff Kreisler along for the ride as he interjects funny stories to drive home certain points. But the real take-aways for me come at the end of the book when the authors make recommendations for what you can do to help you maximize your money. Let’s review a number of these recommendations from the book:
Things you can do to improve your personal money management
- Consider opportunity costs. Ask yourself what you are sacrificing in exchange for what you are getting. One method is to consider how many hours you would need to work in order to purchase a desired item. Then decide if it’s worth your time.
- When you see a sale, only consider what you are actually going to spend rather the amount that you will save. A $50 shirt is still a $50 shirt whether or not it started at that price or if it is marked down from $100.
- When you think about your income remember that a dollar is a dollar no matter where it comes from, whether it is from work, inheritance, or a lottery ticket. Conversely when you think of spending, it is useful to use mental accounting and make categories. For example, “I will only spend $50 on lunches out this month. Once that amount has been spent, I’ll be brown bagging it until the 1st.”
- Use cash whenever possible. Cards and other electronic paying options mask the true “pain of paying.” So if you are trying to curb spending, use cash to introduce a little pain into your spending behavior.
- Don’t believe the hype of over-described items, such as “artisan baby arugula lovingly hand-picked by free-range locavore farmers.” On the flip side, do go along with the language and ritual of consumption if you know that it will add to your enjoyment. Elaborate tea rituals are in the end just about tea, but at the same time are they are about way more than tea.
- Do at least some research when making a large purchase. That’s where you are going to reap the greatest savings, so be thoughtful before you open your wallet or sign on the dotted line.
Easy ways that you can “trick” yourself into better money management
- Connect your present actions in saving money to your future self. By clearly imagining how happy and satisfied your future self will be to have that retirement or savings account builds willpower and helps you to resist temptation today.
- Use a “Ulysses Contract.” These are rules that you put in place to create barriers against your future temptation. Examples include preset limits on your credit cards so you can’t over borrow, only using prepaid debit cards, only using cash or saving in your 401(k).
- Create “Reward Substitution.” This involves linking present behavior that you might not want to participate in with a reward. This way you focus on the short-term reward and not on the more difficult behavior. An example of reward substitution is prize-linked savings, where a bank sponsors a sort of lottery where you earn chances to win money by making deposits into your own savings account. People love them!
Ways to fight the marketing machine
- One downside of our society is that when you spend you have a tangible object to show for it, but when you save you have nothing to touch and feel. To counter this, create some sort of symbol to celebrate meeting a savings benchmark (like saving your first $100, $1,000 or $10,000). You can look at this symbol to remind you of what you have achieved.
- Related to the invisibility of saving money, consider having conversations about money with people you trust to bring the topic of money out into the open. Then they can cheer you on as you work towards your savings goals.
- If you are a parent, open a college savings account for your child and talk to them about it. Research shows that kids with college savings accounts perform better throughout their lives, regardless of the balance in it. And regular account statements remind you what you are working towards as a parent.
- Use direct deposit or automatic transfer to “hide” money in your savings account. By having a lower checking account balance you can trick yourself into believing that you have less discretionary money to spend.
- If you are ready to start investing in the stock market use a “set it and forget it” strategy with one or more low-cost index funds. Research shows that investors who aren’t trying to time the market end up doing better over the long run.
Many in the financial capability field are harnessing the insight of behavioral economics to create products and services that allow people to transform their financial lives. What do you think about behavioral economics? Do you have tricks that you have put in place to aid you in better money management? Share them with other readers in the Comments section below!