Better question: why do people buy things they can't afford and most often don't need, putting themselves in this position?
So many of my peers don't make a lot of money, but then still go out and buy a new or newish/used car and put themselves on a multiyear payment plan. "Oh but it's only 200 a month, I can swing that". Repeat for like 3-4 other things and suddenly they're always complaining they have no money and don't know why.
I highly recommend to anyone who's looking to take their financial situation more seriously do two things:
1. Read up on Mr. Money Mustache, a guy who managed to retire at 30. Even if you don't plan to retire early, it's eye opening to realize you don't have to spend your entire paycheck every month: http://www.mrmoneymustache.com/2013/02/22/getting-rich-from-...
2. Check out YNAB (You Need a Budget): https://www.youneedabudget.com/. Takes a little work to start using, but once you do, you'll understand your money in a way you never thought possible.
> why do people buy things they can't afford and most often don't need
Advertising.
Most people are afraid?/too proud? to admit or even consider they may not be 100% rational or 100% in control of the own actions despite numerous studies showing you are not
Advertising, very obviously, manipulates people into making choices. Most of which are not in their interest. The original article even has an example; in the three kinds of ads for loan. One ad was twice as effective. In advertising, "effective", "conversion rate", etc all mean better at manipulating people into making the choice the advertiser wanted.
You've touched upon the idea of people unwilling to admit that they are in control of their own actions.
I read Blink by Malcolm Gladwell recently. He posted an exercise where by the end of it, it revealed certain internal biases I have towards black people people, namely that there's internal friction to associating positive words with black people as compared to association with white people (I'm not white).
I don't consider myself deliberately racist to black people. However, when I consider the representations of black people I get to see, it's usually negative (in the news, TV/movies) vs. the wide gradient I see for white people.
I know I unconsciously make connections between concepts, such as when I'm learning a new programming language, practicing an instrument, or reading article after article about a certain topic. I don't need to state a = b, because my mind will often make the connection for me. Given the amount of money and time invested in ads, surely I'm also influenced by messages that I consume and that they can affect how I connect certain concepts.
I've been able to attempt to counter it is to practice mindfulness, in order to be more conscious of these thoughts and question why certain feelings erupt. Additionally, reading more about automatic thoughts and the biases that influence them. Lastly, detaching myself from sources of 'bad' information, namely minimizing usage of Facebook Mobile (filled with ads) and television.
That's a fair point. It's sad that most people don't "wake up" from it and learn to ignore and disregard them. Those documentaries look interesting, thanks for the link.
I think the answer to your question depends on how much free will we actually have. There is strong evidence that we, speaking in terms of averages over the whole population, are successfully manipulated into purchasing unnecessary things. Even though it appears to each individual that each purchasing decision is an exercise in free will.
Mr. Money Mustache is pretty awesome but the guy had a very highly paid job that allowed him to retire early. Some of us are fiscally responsible and don't make all that much cash - I find that a lot of his advice is fairly useless unless you have some money to begin with.
"I find that a lot of his advice is fairly useless unless you have some money to begin with."
The bulk of Money Mustache advice is about avoiding paying money for stuff that doesn't really improve your life. This advice is actually more important for people who don't have money. As Mr. Money Mustache points out, most things we buy are "luxuries", we don't need them. And adding a little hardship to our lives, avoiding needless luxuries, actually improves our happiness. See, e.g., http://www.mrmoneymustache.com/2013/08/29/luxury-is-just-ano... --or-- http://www.mrmoneymustache.com/2012/03/07/frugality-the-new-...
In other words, "what the hell is someone doing buying a $1,200 tv on credit?!" What's wrong with a $400 tv? Or a $200 tv? Or no tv?
I'd disagree on that last part - I'd say that if you're not making a crazy salary his advice is even more valuable. Most people spend an obscene amount of money on things they don't actually really need. Some classic examples:
A $3 coffee everyday adds up to about $90 a month, when you can usually just drink free coffee from your office or buy some cheap pre-ground stuff.
Spending $5-6 for lunch each day at work can easily add up to another $100+ dollars a month, when you could just make a bunch of peanut butter and jelly sandwiches and spend a fraction of that.
So there's close to $200 a month, right there.
If you're trying to retire early, it's definitely way tougher on a lower salary. But improving your spending habits is an important skill for everyone, especially for those making less.
This is the best way to get depressed. It's always significantly easier to negotiate a $1k raise than it is to reduce your spending on basic stuff by $1k.
Focus on earning more, not saving (on useless expenses).
>>This is the best way to get depressed. It's always significantly easier to negotiate a $1k raise than it is to reduce your spending on basic stuff by $1k.
Ideally. But in reality with bad habits you will spend that extra $1K you started earning.
>>Focus on earning more, not saving (on useless expenses).
Both. Without discipline its all useless. Why else do you think so many athletes or lottery winners lose those millions?
I like buying stuff as much as the next guy, but if not buying things you don't need would make you depressed, you probably have deeper issues that need addressing.
If you want to save money, do it on large purchases. Buying a $30k car? Negotiate aggressively so you can buy it for $23-25k. Anything above a few $100 is worth haggling over.
Do you know how many people pay the listing price of a car, yet cut coupons to save a few euros/dollars? A lot. It's ridiculous.
Some of the joys in life are simple things, such as drinking a $2-3 coffee or having a cocktail in a nice bar, etc.
Absolutely. I fully recognize my $2.50 americano every morning could be a couple of cups of free office coffee, but I look forward to it every single day. I also drive a 10-year-old but reliable car, so I don't have any huge monthly expenditures outside of rent and my $150 student loan payment. I'll take the $100 or so hit every month in exchange for me starting my mornings on a positive note. It's not going to positively change my life enough to not have that americano every morning.
Playing devils advocate here: you're spending $1200 a year on coffee. With that money you could not only buy a really nice coffee machine and make it yourself every morning, but also have a bunch of money leftover to put towards your loans, invest, put towards a nice vacation, etc.
The idea is that those small daily expenses tend to add up, and there may be a lot more of them than you realized.
"If you had stopped smoking 10 years ago you could afford to be driving around in a Ferrari right now."
"Do you smoke?"
"No."
"Then where's your Ferrari?"
Point is don't sweat the small things. Sure they add up, but you should dedicate a portion of your cash flow towards investments at the start of the pay cycle, not "what's left at the end." Then the rest can be spent on anything arbitrarily with a clear conscious.
Also, buy a coffee roaster and roast your own beans. There are lots of ways to get started on the cheap (popcorn air roaster), and unroasted coffee is around $5-$6 a pound. It's a very rewarding hobby. http://sweetmarias.com is a great place to get started.
The MMM philosophy isn't to deprive yourself. It's to learn to find satisfaction without the high cost.
Personally, I hate eating out every day. Packing a tupperware with leftovers is much more my style. I save about a thousand a year because of this, but I don't feel deprived at all.
For an average American with household income $50k, getting a $1k raise (after tax) is probably not trivial. For techies in SF, definitely spend time on building your career, negotiating compensation, and try to save on rent.
>>why do people buy things they can't afford and most often don't need, putting themselves in this position?
Irrationality. They don't think the situation through.
"Do you know that my personal crusade in life (in the philosophical sense) is not merely to fight collectivism, nor to fight altruism? These are only consequences, effects, not causes. I am out after the real cause, the real root of evil on earth — the irrational." - Ayn Rand
Bad things happen to people when they decide to put their feelings above rational evidence and thought.
As a long time mint.com user, I hadn't checked out YNAB before. Reading some of their info, I see I do most of the same disciplines, but they are really hardcore about the budget.
One thing that stuck out is in their Simplify [1] article, they recommend not having multiple savings accounts for medium to long term savings goals because that's complicated and the budget takes care of it in a simpler way.
In Mint it would be confusing to do that with a budget alone (the money accumulates as a negative budget amount and just looks like you're under budget by more every month), but they have the Goal feature that links a target date and amount with both a budget and one or more accounts (checking, savings, brokerage, etc.). Mint checks the balances for reporting goal progress.
I don't find this to be complicated or cause an excess focus on the location of money. The clear visibility is helpful and puts a sharp focus on both the budget and the (now smaller) balance of the main checking cash flow account. I know I'm not touching emergency savings, anniversary vacation savings, or whatever because there's no way to access the money without manually transferring it out of the dedicated savings account.
Is YNAB so good that one can really clearly see what is going on with both short term cash flow and slightly longer term savings going through just the budget and a checking account?
All I can say is YNAB worked well for me. Though it may only work for a certain type of person. It's one of those things where you really need to take them up on the free trial to see if it works for you.
The way I see Mint vs YNAB is: Mint is reactive while YNAB is proactive.
Consumerism and marketing are powerful things. I know all about the problems debt creates, how it can get out of hand. I've read Dave Ramsey's books and listen to his podcasts. I am very well versed in what it takes to be financially successful.
... But it only takes one moment of weakness to see a new car, fall in love with it, be convinced your life will be better with it and the next thing you know you've committed to 48 payments.
I know that paying an exorbitant amount for a smartphone is not a wise financial move. But here I am anxiously awaiting the release of the Galaxy S7 to see how great it is. I'm sure I'll want one. I'm sure I'll tell myself my life will be better if I can take beautiful photos with the camera and it will be worth the cost in that regard. (My current phone's camera sucks)
... But it only takes one moment of weakness to see a new car, fall in love with it, be convinced your life will be better with it and the next thing you know you've committed to 48 payments.
I'm trying not be rude here, but that is one of the crazier things I've read. I understand splurging on something like a new pair of shoes or sunglasses, but how poor is your willpower and life planning that you just end up buying a brand new car you can't afford on a whim?
A new smart phone isn't so bad if you can afford it (and by that I mean you have the cash on hand for it upfront, and don't need to do a payment plan or something similar). If you're struggling to pay rent though, just get a refurbished 5s or something.
Protip: The note 4 has a wonderful camera and quite often goes on bargain basement sales. If you're OK with used, you can pick them up for a song on Swappa. Personally I wanted a note 4 since it came out, and I waited until after the Note 5 was out to buy it. I love it just as much as if I'd bought it when it was fresh (plus the new phones don't have removable batteries or microSD, and who wants that?)
I think it's peer pressure, every small things that urge them to be the best in their job of consumers and that trick who is: actually paycheck is only valuable when (and not how) you use it (for most people).
So many of my peers don't make a lot of money, but then still go out and buy a new or newish/used car and put themselves on a multiyear payment plan. "Oh but it's only 200 a month, I can swing that". Repeat for like 3-4 other things and suddenly they're always complaining they have no money and don't know why.
I highly recommend to anyone who's looking to take their financial situation more seriously do two things:
1. Read up on Mr. Money Mustache, a guy who managed to retire at 30. Even if you don't plan to retire early, it's eye opening to realize you don't have to spend your entire paycheck every month: http://www.mrmoneymustache.com/2013/02/22/getting-rich-from-...
2. Check out YNAB (You Need a Budget): https://www.youneedabudget.com/. Takes a little work to start using, but once you do, you'll understand your money in a way you never thought possible.