How To Save Lots Of Money Without Depriving Yourself

Imagine you’re looking to buy a big screen TV. When you walk into the store, a salesman approached you and after talking to you about your needs, he gave you three choices:

1. Toshiba – $2000
2. Samsung – $2300
3. Sony – $2500

Other than the brand, you couldn’t see any difference in them – and you didn’t care about the design of the TV. Which would you choose?

Most people would be stumped. Yet we face similar choices on a daily basis. Would you buy a $5, $6 or $7 pen? Which shampoo should you try this month? What about your toothpaste?

According to Dan Ariely, author of Predictably Irrational , when faced with a choice we can’t make, most people would go for the safe choice, which in this case, would be Samsung. Why? Because we are wary of the cheapest choice yet afraid of paying too much for something we are not sure about.

Salesmen know this so they usually sandwich the product they want you to buy between a cheaper and a more expensive model. The same is true for restaurateurs. Why do you think those ridiculously expensive entrees are there, despite the fact that no one ever orders them? Because their very presence in a menu has been shown to make patrons order more expensive items.

Here’s another common scenario. Say you’re looking to subscribe to a magazine. You’re given two choices, which would you choose?

1. Digital only – $59
2. Print only – $128

When asked in a study, most respondents (about 80%) indicated they’d choose option 1. It’s cheaper and you’re getting the same content as you’d if you get the print edition.

But what if I added a third option:

1. Digital only – $59
2. Print only – $128
3. Print and Digital – $128

Now which would you go for? Suddenly 80% of respondents chose option 3 – and paying more than twice what they’d have paid originally.

That’s the premise of the theory of relativity in price perception.

Now you may wonder, so what? Well, if you chose Toshiba, you’d actually have saved $300 without depriving yourself.  Multiply the differences you can save just by being aware of relativity across all the products you buy – everything from groceries, to clothes, to subscriptions and even petrol – and you’re looking at potentially saving thousands of dollars without so much as a tweak in your lifestyle.

Loss Aversion

Relativity, unfortunately, is just one of our many “blind spots”. The next common one is called loss aversion. The theory is, we are more afraid of losing out than we like to gain pleasure. To test this, researchers gave respondents these choices:

1. Save $2000
2. One-third possibility of saving $6000 and two-third possibility of saving nothing

Since most people are risk-averse, 72% opted for option 1. But when the researchers frame the question a little differently, like this:

1. Lose $4000
2. One-third possibility of losing nothing and two-third possibility of losing $6000

Now suddenly 78% became risk-seeking and opted for option 2. If you think about it, that didn’t make rational sense. The options in both scenarios are mathematically identical. Worded differently, however, made people change their behaviour.

Our aversion to losses is why investors hold on to declining company shares – often to the very last cent – even if every indication showed that he/she should cut his/her losses and sell now. They held on to the hope that the share price would rise to the original value, which of course, usually never happens.

Our aversion to losses is also why people scramble to buy anything “limited”, like the latest Apple product or games, even if they have to queue for 48 hours and pay 50% more for essentially the same product.

So the next time you’re thinking of rushing out because you don’t want to “miss out”, be aware of this compulsion to avert losses. Do you really need whatever you’re about to buy? Can you wait a couple of weeks when the frenzy is over and the price drops?

Environmental Cues

The next blind spot you need to be aware of are environmental cues. We like to think of ourselves as being the master of our actions, but scientists are hard pressed to prove that assumption scientifically.

For one, there’s no part of the brain that causes – but is never caused. All parts of the brain are interconnected and can therefore be “triggered”. At least that’s what modern science knows so far. This is why willpower is rarely the answer if you want to break harmful patterns like spending too much. If you are not conscious of what you are doing (which often happens when you’re “triggered”), you can apply willpower to prevent it.

For example, a Cornell University study found that watching TV makes people eat 40% more. You’d think that we eat until we are full yet that’s not the case. Various studies show that people who use larger plates take – and subsequently consume – 28% more food. Conversely, using larger forks make people eat less.

Meanwhile, would you be surprised to find out that more than 60% of our purchases are on impulse? Marketers manipulate shops and supermarkets to maximize it. It’s the reason why staples like milk are often all the way to the back of the store. It’s so that you have to walk past shelves of chips and chocolates.

Most of us never realized that TV has such influence on how much we eat. Nor did we know we are spending so much on impulse purchases. So how does willpower and self-control apply?

What can you do instead? Simply cut down your supermarket visits from once a week to once a month. Use smaller plates and when you eat, talk to your family instead of watching TV. Do this and you’ll see a dramatic difference in the amount you spend on your groceries and food – all without feeling the least deprived.

About The Author

Ally is part of the team that manages several personal finance blogs in Sydney, Australia, which provide tips about Budgeting Worksheet and Ways to Save Money. Before joining the team, she was a Media Planner in McCann Worldgroup Philippines, Inc., with award-winning executions, including the Levi’s 501 “Live Unbuttoned” global campaign