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Easy to rack up, hard to pay down.
Jenny set a goal for herself of saving more money. But month after month she had nothing left in her wallet. Each month she looked aghast at her credit card statements whose balances hardly seemed to budge. On top of that she still had $165,000 in medical school loans to pay back.
What’s wrong with this picture? Jenny is obviously bright, a freshly–minted young physician. But a young woman deeply in debt, as are most graduates these days. About 50 percent of undergraduates fund their education with borrowed money, while over 80 percent of graduate students do so.
Jenny’s problem: her goal is too general and abstract. “Saving more money” is a concept, whereas “I’m going to stick $20 every Friday morning into my old shoe box” is, as silly as it sounds, a concrete goal. It is an action rather than a thought. As it turns out, taking action is a key step in developing a new habit. You cannot think your way into one, but many people try to do just that.
Oftentimes when people want to change they go into a mode of gathering. They scour the Web, read self–help books, turn to experts. After all, “knowledge is power” right? Everyone knows that you will change once you have gathered all the relevant facts. What happens instead is that accumulated facts make you begin to ruminate and analyze. Soon you are over–thinking the problem, and gathering becomes a task without end. You become trapped because knowledge by itself does not change your behavior. Change requires action: doing something different.
For instance, everyone knows what to do to quit smoking or lose weight, yet fails to do it. Information gathering is like sitting on the beach and reading about sailing while never taking to the water in a boat. You have to undertake a new behavior if you want to change a current one. What often sets that new behavior in motion is a jolt of emotion.
For Jenny, it was pocketbook logic courtesy of her friend Erika, who was working on her MBA. It was Erika who noticed that Jenny was spending $3 every day on a Starbucks latte. With borrowed money.At five timesa week that works out to $780 a year. But given that Jenny was going to pay back her loans over 10 years, the accumulated interest made the true cost for those cups of coffee $4,154!
Sometimes only a jolt can make us wise up.
The shock was sufficient for Jenny to wise up and start making her own coffee at home and taking it with her in a thermos. It was premium coffee, too, not some cheap stuff pre–ground in a can. Plus she had enough for coffee breaks later in the day, a new treat to herself that she really enjoyed. Her friend Erika calculated that if Jenny made her own coffee for 30 years instead of buying a $3 latte, she would save $55,341 with interest.
These are shocking numbers, or should be, but the “opportunity cost” as economists call it of small–change purchases fails to shock the majority of people who spend borrowed money on such things. For Jenny, two comparisons helped reality break through: the enormity of what she was actually spending, and the size of the savings that she could apply to her loans. It helped, too, that the facts were presented to her by a trusted friend.
The emotional jolt that succeeds in prodding us must be highly personal rather than general. For Jenny it was. Our fallible minds love rewards, but their in–built aversion to loss is an even stronger force. The money she felt she was “losing” outweighed the immediate pleasure of the coffee. For most people, however, these numbers fail to move. Sipping their coffee reward, enjoying its warmth and aroma, they can’t feel the pain of having to pay because it lies far off in the future.
More on loss aversion and rewards in the next post—especially how credit card companies brilliantly manipulate these built–in aspects of desire.
Meanwhile, you can plug your own numbers into the Coffee Calculator by Erika Lim of Seattle University School of Law. Lastly, the data behind this post come from “Javanomics 101” by Washington Post reporter Blaine Harden.
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