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Tuesday, April 25, 2017

Money is Just Numbers

Posted by Robert on April 2, 2012

Seth Godin is a really smart guy. I really connect with his vision of reality. So when he explains the problems that we have making big decisions about money, I listen. The part that I find fascinating is the part that describes why we have so much trouble making good choices about money.

What it really comes down to is the fact that people don’t make rational choices. In fact, we are emotional creatures that make decisions based on emotion, decisions that we later justify using rational explanations. That leads us to make poor choices relative to money, because we have difficulty translating the long-term consequences into emotional terms. Here is an example from Seth Godin’s article:

You are lucky enough to be able to choose between two colleges. One, the one with the nice campus and slightly moreĀ famous name, will cost your parents (and your long-term debt) about $200,000 for four years, and the other (“lesser” school) has offered you a full scholarship.

Which should you take? …

The college case is even more clear. $200,000 is a number that’s big, sure, but it doesn’t have much substance. It’s not a number we play with or encounter very often. The feeling about the story of compromise involving something tied up in our self-esteem, though, that feeling is something we deal with daily.

What he suggests, then, is to translate the number into an emotionally-invested possibility, and then to compare the two versions of your future to find which one is preferable. In the example of the college choice:

If you go to the free school, you can drive there in a brand new Mini convertible, and every summer you can spend $25,000 on a top-of-the-line internship/experience, and you can create a jazz series and pay your favorite musicians to come to campus to play for you and your fifty coolest friends, and you can have Herbie Hancock give you piano lessons and you can still have enough money left over to live without debt for a year after you graduate while you look for the perfect gig…

For me, the choice is pretty simple. I could spend money on fast food, a new car, a bigger house (none of which I really need), or I could spend money travelling. I know where my dream lies, so I will maintain my current lifestyle. Whenever I’m able to save some money, I’ll use it to travel. As you can see, there are no numbers in my decision, but there are two alternative visions for my future, one of which is clearly more motivating for me.

What is the vision of your future that motivates you to make smart choices with your money?

Comments

2 Responses to “Money is Just Numbers”
  1. Marianne says:

    It’s true that when numbers get larger they kind of transcend our reality making seemingly obvious choices convoluted. Everyone knows the value of $1000 but few people have had real experience with $200,000. Also, I think sometimes (in the college example) people tend to try to put a value on experience thinking that the ‘experience’ of going to the more expensive college will be worth the $200,000 when in reality, the experience will be what you make it wherever you are.

  2. Poor Student says:

    I try to break down big numbers into numbers I understand. I need a one million dollar portfolio to pay me $40,000 in dividends annually (4% yield). That is saving $25,000 a year with no interest for 40 years. That is saving about $2100 a month. I can understand $2000, and even if I can’t actually save that much I can compare the number I save to $2000 and see how close I am to my goal of one million.

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