September 12, 2018

Reverse Marketing Scheme to Spend Less, Save More

When it comes to spending money, especially on big ticket items, we personally like to throw our brain a curveball. This twist also works on recurrent expenses. The trick is to convert all your purchases to measure their impact over your lifetime.

For instance, the cool-giant-flat-screen TV on special at only 3K$ can effectively cost you a little more than 49K$ (for 48 years @ 6%) over your lifetime. If you manage to get a 12% long-term portfolio performance like we do, that single purchase could represent more than 690K$! A lot of dough just to enjoy a groovy TV for a few years...

In the same matter, paying an extra 20 bucks each month on your iPhone plan translates into a corresponding amount between 66K$ (48 years @ 6%) and about 615K$ (48 years @ 12%) over your lifespan.

Analyzing expenses that way sure puts things into perspective and should spur up your frugal nature if you happen to have one.

The Salesman Scheme Reversed

Those huge figure impacts will lure your mind into spending less. Car dealers already use a comparable mental contortion on you. They just do it the other way around. They try to twist your mental into thinking that buying a car is cheap. These days, they present you small bi-weekly payments and hope your weak mind will be seduced by 40-75$ weekly instead of a big 25-30K$ chunk once. They will even stretch payments over 6-7 years now (72-84 months) to obtain even smaller installments.

Remember that the salesman approach will be to offer you a deal constituted of tiny payments that you can supposedly afford more. These installments are reduced with higher frequency (weeks or even days versus months) and longer amortization period (6-7 years instead of 2, 3 or 4). Leasing often gets you into smaller payments but you won’t own the product (car) after the lease expires unless you fork out the (boosted) residual balance.

Just adjust your thinking and reverse that classic marketing scheme in your favor to spend less.

In a similar way, convert your saving objectives into the shortest possible period. Play the car-dealer trick on your mind. In that fashion, saving 25$ a week (or 100$ a month) will seem much easier and more attainable than 725K$ at retirement (36 years @ 12%).

Depending on circumstances, you can use that helpful mental twist both ways. You can effectively lure your mind into spending less, but also saving more.

Estimate Lifetime Impact Using Chart

Using the following chart, it can be quick and easy to give your brain an approximate idea of the long-haul impact of any expense on your finances.

The idea is to use the chart to give you a rough estimate. Calculating those figures should give your primitive instinctive brain a slow-down signal. In the end, it should entice you to spend less.

Contribution amounts can be multiplied or divided to quickly obtain the corresponding result. For instance, if you spend 20$ (2 x 10$) a month instead of the 10$ indicated on the chart, just multiply any result on the chart by 2. Hence, spending 20$ a month over 24 years at 9 % would correspond to 2 x 10 135$ = 20 270$. Similarly, an expense of 50$ (100$ divided by 2) a year for 48 years at 9% would equate to 68 428$ / 2 = 34 214$.

You can also convert spending to the nearest frequency. Spending every day or week would be converted in month. For example, 2$ every day would approximate to 60$ (30x2$) a month or 6 times (6 x 10$) the monthly line on the chart.

In the same fashion, an expense of 20$ per week would account for 80$ (4 x 20$) per month or 8 times ( 8 x 10$) the chart. To be more precise, you could always use a factor of 4.33 (52 weeks / 12 months) instead of 4. But remember that we are dealing with estimates and using the more practical factor of 4 will not disrupt the overall process that much.

On the other hand, be careful not to stretch frequency too far away. It could in fact distort results too much and derail the entire process. We would recommend converting to a month for periods of 3 months or less. A yearly conversion would be convenient from that point (3 months) to no more than 3 years.

If our chart doesn’t correspond to your habits often enough, you could build your own chart to better suit your needs. Note that our chart was constructed using Excel function FV i.e. Future Value.

Furthermore, the same technique can be used for long-term savings. Let’s say you are 25 and your retirement planning estimates you will need 625K$ to stop working at 61 (conveniently in 36 years, I’ll admit). Let’s suppose you can obtain a 9% long-term return. Using the chart, calculations would give you 625 000$ / 32 303$ or about 20 times the monthly chart. So, you would have to save about 200$ (20 x 10$) per month or 50$ (200$ / 4) per week. That way, you’ll realize you can probably afford to put away 50$ from your weekly paycheck and take care of your retirement needs.

Note that our technique doesn’t account for inflation. Hence, the same dollar in a couple decades won’t be worth as much. Inflation would deflate expenses projected in the future, but we don’t want to do that because we’re trying to trick our brain with bigger figures as much as possible. Our primitive instinct brain kind of likes dealing in absolute and doesn’t care much for relative adjustments. Inflation also means we would need to save more to obtain the same relative investment value in the future. Again, we won’t do it to avoid discouraging our primeval brain. 

In the end, let’s hope our somewhat unusual technique, inspired by the best tricksters our there, can help you fool your mind into spending less and ultimately, saving more!

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