Weird Buying Psychology
People’s buying behavior can be extremely bizarre. When it comes to buying versus saving, it gets even more weird. The Finance Buff left a comment on my post about the ‘latte factor’ to that effect. Here’s the comment:
I also think the latte factor got it backwards. True, saving some small expenses helps, but it requires discipline day after day after day. The removal of small joys makes people resentful. Instead, it’s the large money decisions that matter — job advancement, purchase of a house, car, etc. Latte factor trivializes the savings efforts. Cutting down coffee is not enough. Serious savings requires real sacrifice. It means smaller houses, older, less expensive cars, less fancy furniture, less fancy vacations…
Saving and Dieting
FB had a couple of excellent points I’d like to expand on. First, I think it is very true that “the removal of small joys makes people resentful.” I suspect this is a big reason some people fail when they resolve to save more money.
Like a dieter trying to avoid their favorite foods, a new budgeter feels obliged to give up things that make him or her happy. It could be that daily coffee or lunch out, whatever. If missing those things is too difficult…to hell with it. There goes the budget.
Buy Big - Save Big
The second point TFB makes is that large purchases matter the most. This might seem obvious, but it’s worth keeping in mind. Why is it that people will cut coupons to save $0.35 on Hamburger Helper but don’t bat an eye when told they’re being charged a $100 ‘administrative fee’ when buying a car? The car, the house, the college - all those things are major money events. They have great potential to either save a lot of money or cost more than necessary.
I’m guilty of this myself. We’ve only bought one house in our lives. When you buy a house, you’re presented with a whole list of fees you’re paying at closing. I’m sure we paid something like a ‘processing fee.’ I’d have to dig out the paperwork to know how much it cost, which I’m not going to do because I’m lazy. But let’s keep to the low side and say it was $100. I could have saved $100 by asking them to strike the charge. But I didn’t. It cost me $100 real dollars.
That $100 is a trivial amount of money when signing to owe hundreds of thousands of dollars. Most people don’t give it a thought because they’re paying more attention to the much bigger numbers. But a $100 charge in a $500 transaction will most certainly raise eyebrows. Why? One hundred dollars is one hundred dollars.
The difference is the charge in comparison to the transaction size. I think economists call it ‘framing.’
My point is that the major money events in your life are the best opportunities to truly save money. Not buying a four dollar cup of coffee.
September 26th, 2007 at 7:51 am
In the long run, that’s a good point. But sometimes, if you’re looking for an extra $100 in your monthly budget, the coffee will get the ax (unless there’s something else to cut down on). I think the latte factor really depends on your situation, priorities, and needs. For some people, that $100 a month will be a lifesaver. For others, the coffee is a lifesaver.
I say this because in my life, we’re currently not making any big purchases, so there’s no chance to look for hidden fees and such.