"The goal is not to be perfect by the end; the goal is to be better today."
Let me paint four pictures for you:
One: I'm sitting in my office enrolling for my final class to finish up my graduate certificate. At the end of the enrollment session, they flash a big scary number on the screen telling me how much it's going to cost, and they make me pay for it immediately. If I don't pay, I don't take the class. I pull out my wallet and complete the transaction. Ouch. I know exactly how much I have to pay and I have to pay right now.
Two: I'm in college and after class on a Wednesday I meet some friends at a place that has drink specials on Wednesdays. I bring along all my cash, which isn't much, but it lasted all night. I had to make a decision every time someone ordered a round, whether I wanted to partake. I had to make a payment with each beverage, and I consumed fewer beverages as a result.
Three: My wife and I are in a helicopter flying out of the Grand Canyon. It was really fun. I don't know how much this ride costs. I don't know how much the flight back to Las Vegas is. I don't know know how much the food was that was prepared for us on our trip. It was all packaged together and paid for over half a year ago. We didn't have to worry about paying for anything. There was no financial stress.
Four: I'm 20 years old considering investing for the first time. I walk into a financial advisor's office near my place and ask about investing. He has me open two accounts, and told me which mutual funds I should have. I asked him how much I have to pay, and he says I only pay a small percentage of my account balance, and the rest isn't paid by me; it's paid by the fund companies. I don't really know how much I pay since it's tied to an abstract concept like percentage, and I don't know how much he gets paid by the fund companies nor if he put me in expensive products because they had higher commissions (hint: he did!). Finally, I didn't really know when I had to pay because, well, I didn't really pay; it just kind of came out of my account.
Both our awareness of our spending and the timing of our payments can impact our moods and behaviors because of something called the pain of paying.
The Pain of Paying
The pain of paying is the discomfort we feel when we think about letting our money go. It's not necessarily the spending of the money that causes the discomfort, but how we think about being separated from our money. Some people have a harder time than others. We can use techniques (or others can use techniques on us) to increase or decrease the pain of paying.
Basically, the pain of paying has two components; how close the payment is to the actual transaction and how aware we are of the money we are paying.
When we think about the time aspect of the pain of paying, we should think about how much time there is between the transaction and when we pay. If you use cash to buy something, you part with your money at exactly the same time as the transaction. That hurts, because it's immediate. If we prepay for a vacation six months or more ahead of time, by the time the trip we bought happens, we've long forgotten about the payment. On the other side of that coin, if we put something on our credit card or charge it to our room, we enjoy the transaction without having to pay yet. The further the payment is from the transaction, the less pain there is. The most pain is incurred when the money changes hands at the exact time of the transaction.
Attention is another aspect of the pain of paying that we need to discuss. Using cash as an example again, we see exactly how much something costs, because we literally hand over the money to pay for it. We have to count it out to make sure we have enough. We get change back. There's no avoiding it. The other end of the spectrum is an automatic payment. You have near zero awareness of those transactions and only discover them if you look over your statement at the end of the month. How long have you been paying for that gym membership that you never use?
Even debit cards distract our attention from the transaction because, even though we're paying at the same time, it's abstract. I know a guy who went to his favorite lunch spot several times per week and if asked, wouldn't really be able to tell you how much he spent on lunch. He just hands them the card and they hand him a sandwich.