We're all really creative accountants
Plus no dude, living rent-free in your grandpa's summer home isn't making it on your own. Shut up.
This time of year usually comes with money challenges and combined with inflationary fears and food price increases, it’s tempting to jump all-in on frugal/savings/no spending challenges.
I love a challenge and do small ones myself but I don’t jump all-in because I’ll backslide into old spending habits. But the point of financial challenges, I think, is to change a behaviour, not just to save money. To do that, it helps to understand how money affects us physically and mentally.
This article from The Decision Lab provides an explanation as to how we think about money. One common action is mental accounting, which was defined by economist Richard H. Thaler in 1999. The idea is that people classify funds differently, associating different values to money even though it doesn’t change. As a result, people make irrational decisions in their spending and investment behaviour.
(If you’re interested in reading more, his work is Mental Accounting Matters and it was published in the Journal of Behavioral Decision Making.)
Ok, so how does affect us when we attempt to save money or practice better money habits? I’m not an economist but let’s try to parse this out into something actionable.
Money is fungible. Yes, yes, NFTs. We’re not talking about that here. We’re talking about money and how we should think of it as the same no matter where we put or spend it. According to Thaler, we think of money differently depending on how we get it. That’s why we spend our tax returns freely versus not spending our paycheque. The idea is that we think of a refund (or a gift) as found money when it’s really just a refund of the money you paid the government.
It’s also an explanation why so many lottery winners go broke after a big win. They think of it as found so spend it freely.
The first thing we can do is stop putting arbitrary values on the money that comes into us. It doesn’t matter if it comes from a paycheque, tax return, lottery win, money from your parents or $5 found on the pavement, it needs to be treated the same.
Build it into your budget. Yup, it’s the b-word. If you know you’ll get a bonus or a birthday gift, add it to your budget and actually have a plan on how it will be spent.
Write it down. Don’t let the money escape into the ether. Writing it down forces us to acknowledge that the money is there and something needs to happen to it.
Have a bit of fun. Going cold on a habit is hard to maintain so ease into it. Break up the ‘fun’ money into segments. Some can go towards debt, savings and fun.
With that in mind, I guess I should start sorting out my tax documentation.
Let’s talk about how we talk about people like this. The Telegraph praises Kyle for being debt-free and on track to retire by 40. If you don’t read beyond that, you would be tempted to be amazed. Then you read how he does it and it turns out it’s generational wealth.
Look, can we stop talking about people who benefit from generational wealth as financial paragons? Yes, they’ve taken advantage of what is available to them (I would) but they didn’t do it on their own. We have to stop praising their decisions as smart money management. We have to stop holding them up as financial examples to follow. If you have generational wealth, that’s fine but don’t set yourself up as the norm. Also, knock it off, Telegraph. You’re part of the problem.
(I still wonder if this is satire.)
This week’s readings:
How controlling land prices could help solve the housing crisis (University of British Columbia)
Home lending remains unequal (The Center for Public Integrity)
Why young adults can’t afford houses: Hard work got you more in the past than it does now (The Globe and Mail, paywall)