Are you buying opulence or options?

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In a 2003 study called “Do Pretty Women Inspire Men to Discount the Future”, young men and women were asked to choose between a cheque dated tomorrow, versus a cheque dated for a larger amount that could be cashed at a later date.

Each participant was asked to rate photographs of people and cars. The pictures of people were taken from hotornot.com, the website where people submit photos of themselves and are rated for attractiveness on a 10-point scale. Some participants were shown pictures of very hot people (above 9), some were shown not-hot people (around 5), while others were shown pictures of hot cars, and others shown old bangers.

After seeing the pictures, each person was asked again to choose between a cheque tomorrow or a larger cheque later. The only group of people who changed their choice of cheque dramatically were men who had seen pictures of very hot women. The sight of an attractive woman seems to make men want cash right away, as they focus more on the present than the future.       

The sight of an attractive woman seems to make men want cash right away, as they focus more on the present than the future.    

Humans are hard wired to place a higher value on the certainty of something now, rather than the possibility of greater benefits in the future. This behavioural bias is known as hyperbolic discounting or in common parlance “Eat, drink and be merry, for tomorrow we may die.”.

This approach made sense in primeval times, when you didn’t know where your next meal was coming from or what dangers lurked in the shadows. But when it comes to weighing up what to spend your money on, it can play havoc with your financial wellbeing.

Every day you make spending decisions. Some amounts are large, while many are small.  Some affect your long-term future, while most affect your present reality. Saving enough for retirement, which isn’t optional and is the most expensive goal, is hard because it’s so far away, and there are any number of more attractive things you can spend your cash on.

Your spending habits generally reflect what you most value and which reinforce your self-image and identity. Those spending habits which reduce your financial wellbeing generally have an immediate outcome which feels good. While those spending habits which increase your financial wellbeing generally have an immediate outcome which feels unenjoyable. Or as habits expert James Clear puts it, ‘The cost of your good habits are in the present. The cost of your bad habits is in the future.’  

‘The cost of your good habits are in the present. The cost of your bad habits is in the future.’  

Most people like to spend money on things that make life interesting, varied and fun today. But there are so many temptations, opportunities and social pressure to spend our money today, that it can easily crowd out your ability to reduce debt and build savings and wealth.

The spending question I always pose in my financial wellbeing talks is this: Do you really want and need the thing you are about to spend your money on and what will you not be able to do as a result of spending this money on this thing today?

Every time you choose to spend your money on reducing debt and building wealth you are increasing your options in life – on what work you do, where you live, what you do in your spare time and how you’d cope with a financial setback.

Every time you spend your money on consumption the money is gone forever. Many people who drive flash cars, wear the latest fashion, have expensive beauty treatments, and all manner of opulence have the illusion of wealth, but the true cost may be they will never be financially free.

Carl Jung, the famous psychiatrist and psychoanalyst said it well:

“Until you make the unconscious conscious, it will direct your life and you will call it fate.”

If you spend more of your money on improving your financial position, rather than illusory material opulence, you’ll have more options for fun, fulfilment and getting the most out of life.

Warm regards

Jason  

Jason Butler