My friend wrote a really interesting post on her site HerOwn.net titled “How “Goal Spending” Stops Us from Reaching Our Goals.” Here’s an excerpt from the article:
As a recovering marketer, I am going to let you in on a secret. Consumers do not spend congruent to their station in life. Instead, they spend for where they want to be. Each of us has a vision for our idealized self. It’s deeply ingrained in our psyche, and it becomes a powerful subconscious force that drives much of our daily activities. That includes our spending.
So, if we are, for example, an underemployed office worker but we would rather be, say, a celebrity with a house in Monaco, then we will be naturally drawn to spend in a way that projects an image of that idealized self as opposed to projecting the more practical current state of things. Marketers know this, and we take advantage of it. Everyday we bombard consumers with messaging to convince them that they too can live their idealized life if they only had the right clothes, or shoes, or purse. And it works. Every day we marketers tell you that you are not good enough, and you pay us for it.
These comments really resonate for me. I’m always amazed how people think they can spend money that they don’t have. I guess a lot of people aren’t fans of math, because the math of spending money you don’t have (we call that credit) is insane. The place I see this most is in buying a car. Don’t get me wrong, much like my friend Mel mentions above, the marketers have wrapped that small car payment in a really nice bow. It looks really attractive to only think of the car payment as $50/month. This is what’s so hard.
What we need to do to change this mentality is to help people realize that the simple $50 car payment works just as magical when you think about saving $50/month. Why can we think of a small $50 car payment as a small thing, but we can’t think about saving $50/month as a small thing? Saving $50/month is a small thing that adds up quickly. A $50/month car payment is a small thing that adds up quickly the opposite direction.
Reminds me of the famous quote (and there are many variations of it):
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
– Albert Einstein
Don’t get me wrong. There are situations where credit might be necessary. However, 9 out of 10 times (maybe more), credit can and should be avoided.
Savings make you rich. Credit payments make other people rich.