There’s a not-so-strange tendency for people make really poor financial decisions when there’s a lot of money involved.
If you’re buying a $50,000 car that comes with 17″ aluminum wheels, but the salesman offers you the fancy 18″ chrome wheels for only $500 more, a lot of people would accept. Â After all, you’re getting the better product for only $500. Â What’s an extra $500 when you’re already spending $50,000?
People do this with colleges as well. Â The fancy private school is going to charge you (or your parents) $250,000 for a diploma. Â The State school one county over will sell you an equivalent diploma for free, on a scholarship. Â And yet, thousands of people choose to spend a quarter of a million dollars for the fancy private school degree. Â What’s going on?
There are a couple different things at play here, but here’s two of the most interesting.
First, we have a problem with large numbers. Â What is $50,000? Â What is $250,000? Â None of us have ever held that much cash in our hands before. Â We have a vague idea of what it could buy, but it’s not a relatable amount of money. Â It’s just a number.
Second, we have a problem thinking in terms of percentages. Â And extra $500 on a $50,000 purchase is a lousy 1%. Â Who cares right? Â When we abstract it, it becomes meaningless. Â But it’s still $500. Â It’s still an amount of money you wouldn’t ordinarily spend on Amazon without doing some serious research about whatever it is your buying. Â But, in the context of the $50,000 purchase, it’s pretty easy to justify the 1% impulse buy. Â Dealerships are counting on it.
The easiest way to avoid these money traps is to break the amounts down into relatable figures. Â The $500 chrome wheels aren’t 1%, they’re $500. Â They’re that super fancy new espresso maker you’ve been wanting, or that weekend in San Francisco you’ve been planning. Â That $250,000 isn’t a number in a bank account. Â That’s your own Subway franchise, a brand new BMW, and three years rent. Â That’s two and a half years of traveling around the world, spending $250 each and every day.
If you keep this in mind, you won’t be left struggling to decide between what you think you want and some abstract number in a bank account. Â You’ll be deciding between one version of the thing you want with another version.