Tuesday, May 6, 2008

Controlling Spending with Artificial Scarcity

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.

In extreme cases on television shows, part of the solution is to get rid of credit cards and deal in cash. A month of cash is split 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.

9 comments:

  1. You make a good point about shortening the length of the feedback loop. Most credit cards today allow you to login online and check your ongoing balance, which might lag by a few days due to posting delays. However, if you force yourself to login and check the balance daily then you may be inclined to say yikes and curtail your spending. Waiting until the statement arrives in the mail is obviously too late.

    http://himmicane.blogspot.com

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  2. Jim: That's an interesting idea. If you budget some maximum amount that should go on your credit card each month, daily balance checks would definitely provide the necessary feedback. Even better would be if you could tie it in to some screen saver that could give you green, yellow, or red depending on how your spending is going. Automating the login and tying it into a screen saver is too advanced for most people, though.

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  3. "Move the Moolah" is how I use Articial Scarcity. Best described here:

    http://themoneygardener.blogspot.com/2008/03/very-simple-move.html

    It seems so simple that it is downright silly, but I find that actually moving the money you don't need immediately is the key to saving a large portion of your income. I like your term 'Artificial Scarcity', and essentially that is what I am doing here...

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  4. By the way, I really enjoy your blog and I've added it to my blogroll at the moneygardener.

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  5. mg: That's an interesting strategy. Simply taking the money away makes it harder to spend.

    When I first had a mortgage, my wife and I used to save more than 50% of our income, but we put it all on the mortgage by doubling all payments and paying 10% of the original mortgage balance each year. I realize now that I would have been better off to have invested some of this money, but I didn't know that at the time.

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  6. Interesting. I have heard that same sentiment from a few people that I know who have lived more life than I.

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  7. Works for me. I had a hard time controlling how much I spent on lunches and other dumb things until I budgeted $100/month petty cash for such things. Suddenly, spending $5/day on lunch left me broke!

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  8. I'm the girl who makes those people put their money in jars on TV, and you wouldn't believe the number of people off TV who have taken to the Magic Jars with a vengence. It'sw been my experience that some people just have no idea where to start when it comes to managing their money. Ask ten people if they reconcile their bank statements every month and nine will say, "Reconcile? What's reconcile?" And then there are all the people who are AFRAID to look at their accounts. OMG! Money = Fear = Avoidance = Ignorance = Debt = Misery. All you have to do is change the initial "fear" to "power" or "control" and the whole dynamic changes.

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  9. Gail Vaz-Oxlade:

    Thank you for the insight. My wife and I enjoy your show. I have been trying to help people (mostly family) with financial matters for years, but I can only truly say that I'm certain that I've actually helped 3 people. My approach tends to be based on logic and reason, but most people's troubles are essentially emotional. You show has helped me to understand this better.

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