Why is it easier to spend money we don’t have?

Why is it easier to spend money we don’t have?

It’s been an interesting week in the world of ERG. For the first time in my life I’ve been calculating how to spend money I don’t actually have. Typically when we think of people spending money they don’t have, we imagine those taking on debt or diverting funds away from other expenses in order to fund luxury and non-essential purchases. However in my situation it has been spending money which will potentially be owed to me in the future.. and it surprised me at how different the spending mentality became.

Those following this blog for the past few months will be aware that I have recently started a new job as a consultant which, along with a small pay rise, also comes with a company car. No longer am I having to endure the freezing weather on my trusted mototcycle.. instead I can sit in luxurious warmth whilst stuck in traffic for hours on end.

The way my company car scheme works is that you are given a set allowance from which you deduct the cost of the car financing and associated tax liabilities. If you go over this allowance then you can make up the difference from your net pay, and if you go below then the company will add the difference to your income. It all sounds simple enough untill I was the presented with the car options list containing almost 2000 different combinations of make, model and trim. Beside each option was the monthly finance cost and tax payable. I immediatly sorted the list by cost and decided upon the very top option with a cost of -£80 (Ie: They will pay me £80 each month for the benefit of having a free car, excellent).

But then a strange thing happened.. While I knew this first option car would be brand new and very capable of getting me to work everyday.. I couldn’t help but take a look at the next line down. A slightly better model which came with cruise control, at a price of -£70. Hmmm, It’s only £10 difference and cruise control would be nice on those long motorway journeys. Lets go for that one.

Better engine -£60

Heated seats -£50

5 doors -£40

Built in sat-nav and DAB radio -£20

Metallic paint -£10

Keyless entry – £0

I worked my way down the list and settled on the all singing all dancing model which came in at almost exactly breakeven point for the car allowance. Happy with my choice and knowledge that it was ‘within budget’, I hovered over the Complete Order button for a few seconds before I finally came to my senses. Here I was moments away from losing £80 net pay every month in order to have a few extra luxury items on an already luxury item. If someone had asked whether I’d have paid £80 extra each month for this fancier model I’d have laughed in their face.. and yet because this was money I didn’t yet have as it was effectivly owed to me, I had been far more willing to part with it.

How many times has someone owed you £10 and you’ve later just said to “call it a pint” or similar? I’ve heard this sort of thing loads from others and it truely does seem that they are more willing to wipe off debts owed than to spend that money themselves. I wonder if it is a similar mentality for those who regularly load up on credit cards to fund luxury purchases. Would they have still bought that new iPad as easily if they’d have saved up the cash in advance for it and had to physically hand over a massive pile of notes? Or does the fact that it’s going to be a debt against their future self and that they’re spending money they don’t physically have at the moment make it easier to part with?

As for myself; I did end up going a bit lower – Parking sensors.. because apparently cars are a heck of a lot bigger than a motorbike and I still havnt gotten the hang of reversing into a bay!

15 thoughts on “Why is it easier to spend money we don’t have?

  1. People have wildly different attitudes to money

    There are people who earned £250,000 a year and still borrow from payday loan companies

    Equally there are people on minimum wage or state pensions who still manage to save a substantial sum of money each week

    Its all about willingness to spend – on yourself and others, which are different choices

    From almost all of the early retirement blogs I’ve read there does seem to one common almost uniting factor – a propensity to save money from a very early age exhibited in a maybe apocryphal story about saving pennies from odd-jobs as a child

    I have a couple myself

  2. As I mentioned in a previous posting I’m a couple of decades ahead of you and yes I agree with the previous poster.
    My personal journey to FI has been via a very modest take home income but two of the key points have been minimising accommodation and living expenses and minimising work related expenses.

    1. Afternoon Ken,

      It’s always been said that you cannot become rich by spending more than you earn. Doesn’t matter how much or little you make.. it’s the expenses % that matters. I’m always amazed at how much some people spend on their work related expenses. It really is a case of working to earn enough to keep working. Very strange.

  3. Good stuff on recognizing the behaviour. People just have different view when it comes to money. In your situation it makes more sense to pick a vehicle that will not end up taking money out from your regular pay cheque. :)

  4. Hi Guy
    As mentioned before, the people at work who have car allowance are like kids in sweet shops when it comes to getting their new cars and invariably, many of them get sucked into going over their allowance because it seems like “everyone else is doing it”.

    Like you say, may as well get the stuff that you will actually need and find useful (eg the parking sensors), since you’ll be driving the car, not your colleagues so it doesn’t matter what they have in their cars.

    One guy at work, all know that he paid for a full DAB radio plus fancy schmancy ipod deck for his car (he liked to tell everyone). We were talking about music the other day and he revealed that the ipod that he’d bought (yes he bought a new one specifically for the car) is still unused in its box as he was thinking of giving it to someone as a Christmas present…

    1. Hi Weenie,

      Funnily enough, before I’d looked into my company car I had had a chat with my manager who basically said that the huge majority of people on the team chose the ‘trade up’ to a better model.. some at a cost of £200 extra a month! He then started recommending all of those cars to me.. it certainly was a case of following the crowd.

  5. I am guilty of losing money for accepting beer way too often.

    I would consider the cruise control if you have to travel more than locally, however. It could actually save you money form preventing speeding tickets!

    It sounds like a pretty good deal either way.

  6. Beer thing aside which I think can at least be 50% attributed to generosity between friends, I do agree that when people don’t feel like it is their own money they are spending the purse strings become looser. This manifests itself not only in terms of consumer debt but also things like lottery winners going broke, I bet if they’d earnt that money themselves they would be less likely to blow it all so quickly?! On a smaller scale the guy who just won £100 on the horses buying everyone a round in the pub (done that plenty of times myself… Slap wrist for the young Firestarter!)

    Good deal on the company car all round you have there though, you’ve really landed on your… Erm… Wheels :)

    1. TFS – Yes, I think quite a bit of it is generoisty between friends however it was the simplest example I could come up with off the top of my head. I think the point is still the same though that it’s easier to give away what you dont physically possess at the time. The lottery winners going bankrupt is a perfect example of people splashing money too easily because they didn’t have to work for it.

  7. Hi Guy,

    I couldn’t help but smile when I read your description of you working down the list of extras and losing money on each one. I saw myself 5+ years ago doing the same thing, in truth I would have paid money for the extras too. This is the danger of the modern world we live in. Money sometimes isn’t ‘real’ and I think many people have little concept of the value of it.

    several years ago, I decided I wanted a ‘nicer car’. I didn’t want finance at the time (I thought I was smart), so I put the money (£6k) on a credit card and paid it off every month for just over a year. This process made me realise the value of money. I hated throwing money away every month just to own the bloody thing, never mind run it. I committed to myself that if I wanted to buy a car in the future, it would be cheap, and I would pay it off in full straight away. Not that there’s anything wrong with the 0% credit card approach, but I found it demoralising.

    It’s also really surprising when you do the maths on your situation too.

    £80 a month = £960 a year. To have that money returned by a 4% yield, you would need to have £24,000 in an investment. That’s not small change!

    If you went down the road of having £80 a month, you’d have just knocked £24,000 off your FI total. (approx). Not bad at all! I try to use this approach for reoccurring spends as I find it motivating to keep that total down.

    Thanks for sharing, and enjoy the car!

    Huw

    1. Afternoon Huw,

      Interestingly enough I hadnt ever thought to calculate that £80 a month as investment required to fund the difference! Its amazing how quickly those small monthly payments add up and how much you’d need invested to fund it. I’m glad to hear that others went through the same mentality as I have though.. even if they do then come to a different ending ;)

  8. Hi guy,

    I have been reading your blog for a while- congratulations to you and your wife btw. Have one of those sleepless nights so have gone back to the start for some inspirations for my own 2019 goals. Anyway I know it’s bit late but I thought you may be interested to know this is actually a behaviour economics theory: loss aversion. People prefer to avoid loss than achieve equal gains I.e. you would not like to pay the 80 quid for the add ons but you were less averse to it that not gaining 80 quid even though the net result is the same. Some studies indicate your aversion to loosing a value can be twice as strong as your feeling towards gaining. A recent example plastic bag charge vs the discount you get for bringing you own coffe cup. You have to pay 5p for the bag so people feel that loss. You get 50p off you coffee and yet the initiative is not as success. I would imagine if people were told they would be charged 50 p for a cup keep cups sales would be certainly be through the roof

    1. Hello jojo, thanks for your kind words and the economics lesson! I studied business management at university so am particularly interested in the psychology behind business and people’s spending decisions. It’s amazing some of the things people will/wont do without realising it. I know the UK Government has started adopting this ‘nudge’ theory to change many different habbits, its a great idea.

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