• Sunday, December 10, 2023
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How this new study can help you curb spending

You need to stop self-sabotaging your finances

When I was a pre-teen in the early 90s, I used to roam the mall with a pack of girlfriends once a week.

I quickly discovered that the fun I had spending money on new scrunchies, slap bracelets, and Lisa Frank notebooks seemed to diminish as my money supply got lower. Whatever pair of earrings or soft pretzel I bought with the last of my money never seemed worth the price.

According to a new study, there was a reason for my dissatisfaction: a phenomenon called the bottom-dollar effect.

Basically, when we spend the last of our resources on a product, we end up feeling much less satisfied with it. Here’s a breakdown of the bottom-dollar effect and how you can harness it to make better spending decisions:

What causes the bottom-dollar effect?

Opportunity Costs

Behind my dissatisfaction with a purchase I made with the last two dollars in my wallet is something called opportunity cost. Opportunity cost refers to the fact that if you spend money (or time, or other resources) on any one thing, then you can no longer use it on anything else.

When you you’re feeling flush (or when I showed up at the mall with a crisp $20 bill in my fanny pack), you tend to ignore opportunity costs — because you feel as though you have enough money at your disposal. Though buying the glitter slap bracelet meant I couldn’t spend that $3 elsewhere, it didn’t matter because I still had plenty of money available.

Once you get down to the last of your resources, however, then you’re much more likely to think about everything else you could do with your money other than make that purchase. That sense of lost opportunity will color your view of the product, making you less satisfied because it represents a loss of other options.

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The pain of paying

Of course, most people are at least a little reluctant to part with their money. According to the study’s author, “researchers have found that people suffer psychological discomfort when they spend resources. Fortunately, we also derive pleasure from consuming! So long as the pleasure experienced outweighs the pain, we are satisfied.”

That pain of payment becomes exacerbated when payment means you’ll be using up all of your resources. That’s because we tend to think of money in relative terms. So paying for something with your “bottom dollar” becomes much more painful.

What this means for you

Though the authors of this study offer some suggestions for helping marketers overcome the bottom-dollar effect with customers, I think it’s an advantage for us as consumers.

If you know you’ll be less satisfied with a product you buy with the last of your money, then you’re much more likely to just keep your cash in your wallet. This is one of the many reasons why it’s such a good idea to only go shopping with cash. Credit cards simply don’t give you the same pain of payment that forces you to stop and think before each purchase.