Tag Archives: Behavior

A thought on “Saving”

If I had a dollar for every time I’ve heard someone say they’d like to save more money, I’d be a rich man. In all my years of teaching, I have never met anyone who wouldn’t like to have more money tucked away in savings.  So why don’t we save?  My students tell me it’s because they can’t save.  They don’t have enough money to save.  There’s never any money left over to save after they have paid all of their bills.  When encouraged to examine these responses more closely however, nearly everyone recognizes that he or she has saved for something at some point in his or her life, and, no matter what his or her income level, has at least one penny left over at the end each week that he or she could potentially be saving.  So, if it’s not that we can’t or we don’t have enough, then why don’t we save?

One of the barriers that often prevents people from saving has to do with a pervasive belief that saving is only worth doing if the amount being saved is a large number.  All humans, whether they are aware of it or not, have in their heads a dollar amount below which money holds no value for them.   A penny, a nickel, a dime, a quarter, even a dollar, although it could be saved isn’t hardly worth it in most people’s minds.  This is especially true of people who feel they must save a lot of money in a relatively short period of time.  Consider retirement, for example.  People who feel inclined to save for retirement typically believe they need to save a large amount of money in a relatively short period of time.  Even as much as a dollar per week in savings, in this particular example, seems to most people insignificant and hardly worth it.  So instead of saving a dollar per week, what do they do? They save nothing, because they don’t see the value in it.

When you are able to see that saving is more about implementing a behavior than it is about any particular dollar amount saved, you can perhaps begin to see value in doing it.  So pick an amount that you believe you can comfortably save over the next day, week, month, or whatever.  A penny, a dollar, ten dollars, twenty-five dollars, it doesn’t matter.  Pick an amount.  Start small.  Work it into your budget as a line item.  Start saving.  Start now.  And keep going.

 

The Pain of Paying from Dan Ariely

Here’s a short video from Dan Ariely about how we spend differently depending upon the form of payment we use.  If you are not familiar with Mr. Ariely’s work, you should definitely check him out.

Misbelief

Rational Behavior Education and Your Budget

In the world of economics they have the concept of “Homo Econimicus” or “Economic Human.”   This concept indicates that humans are rational beings that act only in their best self-interest.  This is typically used to explain markets and economic theories but in most circles, especially the academic and professional/political circles, it is a quite predominant perception of how humans act in regards to their personal finances and economics.

Well, a lot of education on how people should behave has a very similar approach.  I call it the theory of “Rational Behavior Education.”  My theory on this is that most education is based on the idea that humans are totally rational and if provided with a good rationale as to why a behavior should be changed, the human will naturally see the benefit of such a change and quickly adapt the new behavior.

Let’s take smoking for instance.  We all know smoking is bad for human bodies.  But most education is focused on discussing the fact that it is bad for us, by telling us all of the negative side effects of smoking.  I was a pretty extreme smoker for over ten years and this is what people would tell me over and over, “Your lungs are black, your breath smells, it costs a lot of money, it makes your teeth yellow, it causes cancer, oh, and you could die.“  Now, I know at one point in time, people did need to be convinced that smoking did harm to their body, but that time is long gone.  We know it.  We have heard it for decades.  We know!  But if we were totally rational humans focused solely on our own best interest, we would see quite clearly that smoking is not good for our body, costs a lot of money, makes us smell (which could prevent potential mating possibilities, maybe), and make our teeth yellow, makes our clothes smell and so on.  We would see all of that and we would stop. But do you see the problem?  Yeah, we’re not rational.  Humans can be rational.  We can be unbelievably rational creatures.  We may be, perhaps, the most rational beings on this planet – maybe anywhere in the universe. But we are not ALWAYS rational.  And educational efforts about behaviors aimed solely at our rationality that neglects to touch on how irrationality and emotion plays a significant role in our behaviors will be minimally effective.

In the world of Rational Behavior Education, if we could just teach everyone how to create and manage a budget, a person’ personal financial life would be sunshine and happiness.  But telling people that smoking is bad for them and that they should budget their money is only occasionally, mildly effective.

 

Opportunity Cost

Opportunity Cost is a fancy schmancy term that is usually used in economics classes and it usually is applied to how people use their money.  But I have found that the concept applies equally as well to how we utilize our time, and in fact many people actually grasp the concept better by applying it to time.

The opportunity costs of a particular action are the benefits you could have received by taking an alternative action.  As I mentioned, opportunity cost is usually discussed in terms of money, so here’s what it might look like in an econ book. Imagine that you invest in a stock yielding 3% over the year.  By investing money in the stock, you give up the opportunity to invest in something else like, for instance, a risk-free government bond with a 7% return.  In this example, the opportunity costs are 4% (7% – 3%), the difference in return between the forgone investment and the chosen investment.  Blah, blah, blah – insert lots of additional economics jargon.  What does that mean to you?  Well it means that every time you make a decision to use your time or money one way, you can no longer use it for something else.  The cost is what you spent on the item; the opportunity cost is what you could no longer purchase with those funds. And I know you might be thinking, “Duh! That’s so obvious.” But believe me when I tell you that people often don’t really think about it this way – especially in their day-to-day decision-making.

Now, as I said, opportunity costs are usually discussed in terms of money, but I think the concept can be applied to our time and energy as well.  For example, if I work an 8-hour workday, take 30 minutes for lunch, and commute 30 minutes each way, that adds up to a total time cost of 9.5 hours.  Since that window of time is devoted to and taken up by work, the opportunity cost of working therefore includes everything else I am unable to do during those 9.5 hours.  Spending time with my children, preparing and eating a meal with my family, exercising or recreating with my friends, and watching a favorite television show with a loved one are all examples of the opportunity costs of working.  In order to work, I must give up the time that might otherwise be spent doing and benefitting from something else.  In either case, a choice between two options must be made and the benefits I could have achieved by choosing the alternative option, whether monetary or otherwise, are the opportunity costs.

For some people, this concept has a huge impact on how they see their resources flowing out of their possession. But even if this isn’t a big “Aha” moment, this little concept of opportunity cost, the fact that we have to give up one thing for another can cause us to squirm a little.  Let’s say that I really want that pizza, but I know I’m going to need that $15 for childcare in two days.  But I really want that pizza!  But I know I’m going to need to pay the childcare!  There is conflict, and that conflict leads to some squirming.  And in that squirming we find ourselves dealing with a little problem we discussed earlier.  This is where you might notice that we have Internal Inconsistencies with our time as well as our money.  I might justify what I have to give up by rationalizing my choice, like, “I’m just too tired to cook tonight.” Or maybe some mental bookkeeping, like “I’ll just pay a little less on my credit card bill this month.”

Opportunity Cost is something that is happening every time you make a choice.  It is not something to be eliminated, but rather to be aware  of to help you in your decision-making process.

 

Time Value of Expenses

How much time and energy, in terms of work hours, does it take you to pay for housing, transportation, food, health insurance, car insurance, or entertainment?  Do you know?  If you are like most people, you may have thought about this as it applies to some of your expenses.  Or not. In either case, I have found that when people begin to apply the following exercise to their expenses, they tend to see how or if their expenses are really in alignment with their values in an even deeper way than when they did the receipt exercise.

Here’s an example of how it works.  The other night I took my oldest son out to dinner and to see a movie.  We went to a nice little restaurant.  Not too expensive, but definitely not the “value meal” at the local fast food joint.  The total cost of the meal with tip was around $45.  Movie tickets for the two of us cost $24.  The “Value Package” snack we bought at the theater cost $15.  Total cost for the evening totaled $84.  Now if I’m making $10 per hour and the night out cost $84, then the time cost, in terms of work hours, for the evening out with my son was 8.4 hours.  Well, I know that I work approximately 8 hours each day and so the cost of the evening out was slightly over one of my work days.

In addition to being a good chunk of change, that’s a lot of time and energy. When we pay for rent, mortgage, dinner out, movies, or anything else for that matter, not only does money leave our possession, but so does the time and energy that money represents.  Whenever we spend money, we also spend our time and energy.  And like money, once that time and energy is spent, it cannot be used for anything else.

Of course, using the same example above, we could break out each expense separately as well.  The meal was $45.  If I divide that by $10 per hour I would see that the meal cost me 4.5 hours of work.  The movie was $24, divided by $10 per hour and I would see that the movie cost me 2.4 hours of work.

To calculate the time value of a particular expense, you take the amount of the expense and divide it by the hourly wage you listed above and you can figure out how many hours it takes to earn that expense.

Now, let’s take a different expense.  Say for example your food costs $250 per month and your hourly wage is $10/hour.  Divide $250 by $10 and you will see that it costs 25 hours of work time.  Of course, I’m using simple round numbers to demonstrate and your numbers might not be so simple and round.  No problem.  You can either do the exercise with your exact numbers using decimal points and all, or you can round up or down.  I’m not looking for perfect calculations – this is not a math class!  I just want you to get a better idea of how much of your work time is devoted to your expenses.

How Much Are We Really Spending

People typically think of rent or mortgages as monthly expenses since, after all, we pay those expenses on a monthly basis.  In actuality though, we are paying for every hour, every minute, every second, EVERY MOMENT, of every day. For example, if a typical month has 31 days and there are 24 hours in each day, then the number of hours in a typical month equals 744.  If my rent costs $1,000 per month, I accrue approximately $1.34 in rent per hour and approximately $32.26 per day.

Calculating rent, or mortgage, utilities, credit card bills, grocery bills, etc. down into an hourly or daily amount might not sound like a lot of fun, and my goal here is not to turn you into a human calculator or to persuade you to spend an exorbitant amount of time calculating every single one of your expenses in this way.  I simply want to raise awareness about how much money is really flowing out of your possession, so often without your awareness or knowledge, at any given hour or on any given day.

Time Value of Income

Attaching a monetary value to one’s time and energy, particularly in a work situation, is not uncommon.  Most people know how much money they earn per hour.  On several occasions in my life I have taken jobs that paid around $7.50 per hour.   That’s pretty black and white.  1 hour of my time and energy at work was worth $7.50.  On the other hand, salaried positions are slightly less black and white in terms of time value.  My first salaried position paid $28,000 per year.  The value of an hour of time in a salaried position depends on the number of hours worked during a particular year.  If, for example, in my salaried position, I worked 40 hours per week for 50 weeks, I would accrue 2,000 hours per year, and my hourly rate would be about $14 per hour.  In that case, 1 hour of my time and energy at work would be worth $14.  If however, I worked an extra hour per day for the same number of weeks, I would accrue 2,400 hours per year and my hourly rate would drop to $11.66.  In that case, 1 hour of my time and energy at work would be worth $11.66.

As I said, most people, even those who are salaried, have figured out how much money they earn per hour, but just in case you haven’t, or haven’t done it in a while, we’re going to take some time and go through this together.  But then, we are going to take it one step further.  I’m going to ask you to determine your wage by minute.  Most people have never done this exercise. However, the information that we learn by doing the wage by hour and the wage by minute exercise will be very useful in the exercises that will follow.

Please note, some of these figures that you come up with might not be totally accurate, don’t get hung up on that. The information will still be beneficial and the figures will be close enough for our purposes.  I’ll refer back to this exercise and some of the numbers we figure out here in later posts and exercises.

Okay, so here we go.

Wage by hour:

Begin by figuring out how much money you earn per hour.  For the purposes of this exercise, we will only use our “gross earnings.”

  • If you earn an hourly wage, like $10 per hour, then this is easy.  Your time value for this exercise will be $10/hour.
  • If you are salaried, then we recommend, for simplicity that you divide your yearly salary by 2 and then drop the zeros.  So it looks like this:

Example:

$24,000 per year divided by 2 = $12,000, then drop the last three numbers and you get $12.

Wage by minute:

This is a computation that very few people undertake.  But when we get ready to look at the time value of our  expenses, knowing our wage by minute can actually be very beneficial.

To figure out your Wage by minute, take your hourly wage and divide it by 60:

$10 per hour divided by 60 (minutes) = approx. 17 cents per minute.

 

So hang on to this information.  We’ll use it in some of the upcoming posts!

 

 

 

Perceptions of Income – Gross v Net

We need to take a moment to discuss your gross income versus your net income.   In case you don’t know, your “gross” income is the full amount of a source of income (like your paycheck) before taxes or any other deductions are taken out.  After they take the taxes and deductions out of your source of income, you receive what remains and this is referred to as “net” income.  As an example.  If your hourly wage is $10 per hour and you work 40 hours during the week, your gross pay is $400.  But when you receive your paycheck, you notice that it is only $350. That is because they have taken out all of the taxes.  The gross pay was $400, the net pay was $350. Pretty straightforward, right?

Okay, so this is where a lot of programs leave this information.  There is money that is “taken out” of your paycheck and you should know the difference between “gross” and “net.”  But there’s some important information that is being left out, and in my efforts to eliminate our tendency to DISCOUNT the value of anything, we need to look at this just a little bit longer and perhaps from a slightly different perspective.

First, it is very important that when we look at our hourly wage or salary that we give it the total value.  For instance, in the example above, you earned the full $400 and we want to recognize the full amount.  But what happens is we tend to focus only on the net income because that is what you are going to use to pay your bills.  There is a tendency to think of the money we didn’t receive as being “taken out” – which is only part of what happens.  That money is taken out, but it is used to pay for something.  That is to say that you are actually spending that money.  You are spending that money on a lot of things.  Some of it goes to pay for roads, police, military, libraries, schools.  Maybe some of it goes to pay for your health insurance or a retirement account.  Maybe some of it goes to child support.  Wherever this money goes, it is you that is spending it and we want to recognize that it is our money that is leaving our possession.

The point of this discussion is not to argue whether your tax money is being spent well, or what is fair or right, or who is to blame for anything.  The point is to illustrate that the money between “gross” and “net” is money that is spent on goods and services.  It is money that you earned and we do not want to DISCOUNT the value of those resources by not acknowledging them.   So, yes, the money is “taken out” but then it is paid to someone else.  It is not something that is happening to you, it is a process in which you are actively participating.

 

Perceptions of Income

I have found that people typically think of income as the money they earn at work.  However, I’d like to challenge you to think of income as any resource that is coming into your possession.  Some of it might be monetary, but sometimes it’s not.  For instance, we definitely want to recognize if we receive income from our work, but we might also receive income from unemployment or from investments and we want to recognize that as income.  Sometimes it comes in the form of cash, but sometimes it takes different forms.  It might come in the form of food stamps, housing assistance or perhaps educational grants and scholarships, or assistance with our health care costs.  It might come in the form of a loan from a relative, a student loan or a second mortgage – I know, you’re thinking this is debt, and it is, but these are also resources that are coming in to your possession.  Income could also be the money you get during the holidays or on your birthday. Or perhaps that $20 your parents sent to you, just because they love you so much.

In addition to the income that we get in the form of money, I’d like for you to think about the resources that come to you in different forms.  Perhaps your grandmother gives you a sweater – is that income?  Or perhaps your friends watch you children while you go to the doctor – is that income?  Maybe your mom made you a dinner and brought it over to your house – is that income?  Maybe your friends took you out to dinner or bought you a drink – is that income?  Maybe, in our traditional way of looking at income, it doesn’t seem like it.  But these are all ways that resources come into your possession and they definitely have value.  We want to recognize those as well.  Sometimes with these non-cash forms of income or “in-kind” income it is hard to put an exact value on them and it is not necessary that the amount be exact, but we should at least give them an estimate.  At the bare minimum we should be cognizant that we are receiving something of value.

Here are some reasons why this is important:

  1. It is important to recognize that resources, both cash and non-cash are constantly coming into our possession; WE DO HAVE MONEY – even if it is not as much as we would like to have at this moment.  (So stop saying you don’t have any!)
  2. It is important that we don’t DISCOUNT the value of any of the resources that we receive;
  3. It is important to recognize that many of our non-cash resources are valuable and again, we don’t want to DISCOUNT the value of those resources.

 

Creating Perceptions Through Marketing – Part 3 – Data Mining

Now let’s take a moment to consider all of the ways in which marketers and advertisers are able to access information about the individual consumer’s spending habits and personal shopping needs.  Google is a marketer/advertiser gold mine.  Spend a few minutes surfing your favorite Internet sites and they know a lot more about you than you probably would like for them to know.

Target, who has been credited with being able to find out if a customer is pregnant, even if she doesn’t want them to know, has been collecting vast amounts of data on every person who walks into its stores for decades.  Each Target shopper is assigned a unique Guest ID number that not only keeps tabs on everything you buy but is also linked to demographic information such as your age, marital status, number of kids you have, which part of town you live in, your estimated household income, how long it takes you to drive to the store, whether you’ve recently moved, what websites you visit, and what credit cards you carry in your wallet.

Acxiom, the leader in the multi-billion dollar database marketing industry, was featured in a June 2012 New York Times article by Natasha Singer and was said to have databases containing “information on about 500 million active consumers worldwide, with about 1,500 data points per person…and knows things like your age, race, sex, weight, height, marital status, education level, politics, buying habits, household health worries, vacation dreams – and on and on.”

Wait a minute – did they say “multi-billion dollar database marketing industry?” When I first read it, I just kind of read on by, and then about a paragraph later, did a double take.  Database marketing Industry – in the words of my three-year old daughter – “What does that even mean?”  It means, folks, that there is a whole industry dedicated to gathering as much information about you and your behaviors as possible and selling it to others who then use it as a tool to try to manipulate what, where, and how you consume goods and services.  Now I promise I’m not going to go all 1984 on you.  I’m not a conspiracy theorist.  All I am saying is, if you ask me, that is kind of creepy.

So, what is the purpose of all of this marketing anyway?  In layman’s terms, marketing is an effort to get consumers to behave, i.e. spend their money, their time, and/or their energy, in ways the marketer would like for them to behave.  Retailers want you to spend your money, time and energy consuming their products and services.  The Humane Society wants you to spend your money, time and energy supporting their philanthropic efforts.  Politicians want you to spend your time and energy voting for them.  Anti-drug campaigns want you spend your time and energy not doing something – “just say no.” Even awareness campaigns and health campaigns want you to spend, or refrain from spending, your money, time and energy in a particular way.  They all want you to do something, to behave a specific way.

Successful marketers know that one of the most effective ways to get customers to spend money, time and energy consuming their products and services is to convince the customers that they need a particular product or service.  Most often they accomplish that by either creating a need where one did not exist before, or by turning a want into a need. That is to say, by changing our perceptions.