The Big Cajun Man over at the Canadian Personal Financial Blog asked for insights into his spending habits in this post. Like many people, he’d like to spend less and save more, but reality is not exactly matching his wishes.
The best way I know of to do this is to shorten the time from spending money to when you realize that you’ve spent too much. Most of us know the futility of yelling at a dog hours after it misbehaves. Controlling the way a dog behaves requires that rewards and punishments come right away.
People are more sophisticated than dogs, but similar principles apply. When using credit cards, people can overspend for about a month before the statement arrives giving feedback on what they’ve done wrong. Even then, the minimum payment is manageable and the real problem can be ignored.
Many young people go for years overspending until various interest payments build up to the point where they can’t keep up. Most people need negative feedback about their overspending much sooner than this.
One solution is to get rid of credit cards and deal in cash. Split a month of cash up into piles for gas, food, entertainment, etc. The main effect of this drastic step is to give people feedback right away that they are spending too much. If $50 is allocated to entertainment each month, it will be obvious immediately that spending $40 on the first day of the month is a problem.
So, for the Big Cajun Man and others who aren’t meeting their financial goals, one approach to solving the problem is to find a way to create scarcity. This usually involves creating rules for yourself that are essentially mind games.
Someone who overspends on clothes might have a personal rule to only pay cash for clothes. Other people might split income into different bank accounts for different types of spending. The effect of these rules is to stop you from spending when you have no cash or a bank account runs low.
No one solution works for everyone, but each approach achieves the same thing: creating a feeling of scarcity. I’m interested in hearing about techniques that others have used to introduce artificial scarcity to control spending.