Photo: Adam Alter
Blowing money on one-time, unplanned expenses is the real reason we can’t stick to a budget and spiral deeper in debt, according to a new paper, “The Exception Is The Rule: Underestimating and Overspending on Exceptional Expenses.” Think about it: How often do you plan for unexpected events?
Most Americans don’t have $2,000 shored up for financial emergencies, so when they go overboard on date night dresses and root canals, clearly they’re setting themselves up to live check to check. No planning = no budget = no savings.
“Chronically underaccounting for these expenses can cause consequential errors in financial planning, resulting in over-spending and under-saving,” said the paper’s author, NYU Stern assistant professor of Marketing Adam Alter.
Alter and co-author Abigail Sussman did a study comparing how participants spend on regular expenses versus unusual ones. To no one’s surprise, exceptional expenses cost twice as much as the ordinary ones. And participants admitted they’re more willing to splurge on a one-time event just because it feels special. But when lumped with similar events, they were less inclined to open their wallets.
The lesson: Start planning ahead and redefine what feels “special.”
And if you find yourself trapped in the check-to-check cycle, take these steps to bolster your savings:
1. Get conscious. Learn to tell the difference between needs and wants. Consciously ask yourself whether a seemingly awesome purchase (or bargain, or must-have item) is worth it.
2. Use cash. There’s nothing like watching cash leave your hands to remind you of all the junk you buy. Debit and credit cards make it easy to “swipe and forget,” but one quick glance at your wallet could give you the scare you need to reboot your habits.
3. Automate your savings. Here’s one time when the “set and forget” rule applies. Every paycheck, put a chunk of the money in a liquid savings account. It doesn’t have to be much, just enough to keep your checking account healthy for paying down debt, making ends meet (rent, groceries, utilities) and discretionary income (that morning latte). When the money leaves your checking account, you won’t even notice it.
4. Don’t break the bank. “(You need) a cushion to absorb most of life’s relatively minor financial catastrophes (basic car repairs, bail for a relatively minor felony, taking time off from a job to audition for American Idol, etc.,” said personal finance guru Zac Bissonnette.
Don’t take it for granted.
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