Color of Money Live

Dec 05, 2013

Are mental barriers affecting your money?

If so, join Washington Post nationally syndicated personal finance columnist Michelle Singletary for an online discussion on Thursday, Dec. 5 at noon ET.

Her guest will be Eldar Shafir, co-author of November's Color of Money Book Club pick, "Scarcity: Why Having Too Little Means So Much" by Sendhil Mullainathan and Eldar Shafir.

If you can't make the chat, submit your questions early.

--Bureau will be powerful ally in the corner of student-loan borrowers in March

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November's Color of Money Book Club column: Unpacking the scarcity mind-set: Why having too little means so much

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Jealous sibling has her nose out of joint and in other people'€™s business

Welcome. I'm so happy you could join me today.

I have a guest Eldar Shafir, co-author of “Scarcity: Why Having Too Little Means So Much, which was the November Color of Money Book Club selection. He’s got some great ideas so pick his brain. The issue of scarcity is such an important topic. Let’s talk about the why behind the scarcity mind-set.

 Let’s get started.

 

Thanks for having me, Michelle!  A pleasure to be here with you.  Eldar

 

Hi Michelle, This question is really about your personal opinion on a few things. I feel like I am very generous but not monetarily. I really don't like giving money, because there have been too many times when I've been disappointed with how it is used. I volunteer and am very comfortable giving my time... which, if I were paid for it, would be worth a lot more than any check I could write. What do you think about this? I have been criticized by friends and family a couple of times. I don't make an unusual amount of money, but am able to live comfortably because I am frugal and invest heavily. I am tired of being judged by the checks I don't write, but perhaps I need an attitude adjustment? Also, here is a hypothetical question for you. Do you think people with the option to retire early because of sound financial decisions really should work longer to be able to help others financially? Thanks in advance for your input.

I think your concern and engagement with the issue are already commendable.  There are many ways to give wisely -- both time and money -- and ways to give less well.  Non-for-profits have stories of people who show up to help but are mostly "in the way."  And then there are ways to donate time that are wonderful.  Similarly with money.  There are organizations that will tell you what proportion of your money actually reaches the intended recipients.  And if you still worry about that, you can always give direclty.  Given the time you seem to be spending, you can probbaly locate needy people and give them directly what they need, in ways that can be life altering.

I agree that clearly you are a thoughtful person. Some folks don't bother to give their time or money. So kudos to you.

But I will add this. Time is valuable but so is money. If you can do both that's the ideal. Why? Organization most definitely need your time, but they also need your dollars. Soup kitchens wouldn't need volunteers if they didn't have food to give out and that means money. They need money to keep their lights on or trucks working to deliver food. They need to pay their staff. Same with other organizations. They need money to run the operations where you serve.  And if you are a careful donor, you can find organizations that are good stewards over  your money. 

Has increasing minimum wage ever made a lasting difference? It seems like they are always saying they need to increase minimum wage because it isn't high enough for people to live. If they raise minimum wage to $15/hr, what happens to the people who were already making $15/hr? Won't they too expect their pay to be doubled to $30/hour. And if their pay is doubled, the people currently making $30/hour will want $60. It may not happen overnight, but soon everyone's pay will be doubled and then the costs for goods will also double. Suddenly, $15/hour won't be enough money for someone to live and they will need to raise minimum wage again. And, I don't think that minimum wage should be a living wage. Minimum wage jobs should be for teens. We have an excellent school system which should provide people with the skills needed for jobs that pay better than minimum wage. If anything, we need to invest more in education to make sure people have the opportunity for better jobs.

You ask a deep question.  What matters is both absolute and relative pay. When I earn more I feel better.  And if You earn more thna me and I catch up, you'd like to earn more too (assuming, of course, that we know how much each earns, which is not always the case.)  But then there's also the issue of just plain absolute level - being able to afford a minimally acceptable American life.  And the idea of a minimum  wage is just this - to allow for a minimally acceptable life.  If there were enough jobs for everyone, your notion of gettign everyone ready would be a fine one.  As it stands, there seem not to be enough minimally acceptable jobs; jobs of the type that would allow one to live "minimally well."  Hence the need to worry about minimum pay. 

 

 

My friend was laid off from her main job and runs a party planning business on the side. She was surprised that the income from planning parties mostly cancels out the unemployment benefits she would get from loosing her fulltime job. As I understand it, if the unemployment benefits say you qualify for $200/week but make $150/week in a side business, they will only pay the difference. In essence, the $150/week is like working for free because you would get the same total amount of money each week if you didn't work the side business. Isn't there a way to encourage people to make some money while looking for a job instead of the current system which seems to penalize people who can earn some money, even it if itsn't as much as they used to make.

The logic of benefits is tricky - think about it:  You help people until at some level of income you want to stop.  So anybody who's near that fine line will all of a sudden find themselves "penalized" for making more.  Having said that, it's still worth your friend checking.  Might she qualify for EITC?  That's one benefit that, again, up to some point, gets bigger as you make more.  And then, of course, comes just the good feeling that many people report having when they find a satisfying job, rather than having to rely on help. 

Hi Michelle, I have one credit card that I pay in full every month. I use my card for almost everything because of the rewards program. Sometimes I'll end up with large amounts due at the end of each month (but I always pay it off). I'm wondering if it may be more beneficial to open a second credit card account to spread my credit card usage a little bit. I already own a home and a car and I don't plan to need more credit than I have now, but in the long run is it better to not have such a high balance due at the end of the month even if I pay it off? Thanks for your thoughts!

Well, how much you borrow and on how many cards you borrow on are two different issues.  If you shop wisely, and spend not more than you ought to, then charging it to a card that gives you bnefits is fine.  Charging it to two cards rather than one (assuming you maintain as low an interst as possible in either cse) is just more to manage and remember, but otherwise the differnece is largely immaterial.

 

I agree, if you pay off the card every month, you don't need another one to spread the risk. Besides, perhaps seeing the large balances on the one card might keep your spending in check. And you should know a lot of studies show that when people use plastic they spend more than if they used cash.

Thanks for taking my question. My son is starting high school next year. We need to decide if he will go to a public or a Catholic high school. The cost of the Catholic high school is around $15 K per year and he is currently in a Catholic middle school. We can afford the Catholic high school making some sacrifices that include reduce the contribution to his 529 plan, and reduce the contribution to our 401 (K). Do you have any recommendation about how to evaluate the cost of a private high school versus the benefits.? We live in an area that has a very good public high school.

Your last point -- that you have very good public high schools -- makes all the difference.  Of course, many good Americans are not that lucky.  As long as you have that, then the issue boils down to one of nuanced values.  How much you care about a Catholic education, who the people around your son will be, and what you prefer.  All that, relative to potential sacrifices in other areas of your financial life.  A subtle balancing you'll need to contemplate with the family.  Good luck in either high school!

I love Eldar's answer. Let me add this too. Many parents think private schools increase their child's chance of getting scholarship money. But studies show the increase doesn't offset what you spend compared to the free money your child might qualify for. So keep that in mind. My husband and I chose a good public high school program for our oldest. We don't regret it for a moment. Not only did she do well, the savings allowed us to boost the savings in her 529 plan. So now we have enough money to send her to college AND pay for graduate school.  

I feel like my retirement savings are growing too slowly. I have an idea that my goal should be to have $1,000,000 in savings by the time I retire, but event saving $10,000 per year, it would take me 100 years to save $1 Million. Since I only have 25 years until retirement, I would need to save $40,000/year which is totally impossible without a huge raise. With interest rates less than 1%, I don't think I can count on my savings doubling every 7-10 years.

You may want to consult an expert on how best to go abotu saving for retirement.  Most venues will give you more than 1% interest.  So your simple calculation (of $10K times 100) would be a massive overestimate of the years you'd need.  Some employers will also match part of your deposit, etc.  You're wise to attend to this - worth looking into with some professional help.

You are also not factoring in actually investing for retirement rather than putting the money in a simple savings account. Even with compounding at today's super low savings rate you won't reach your goal. But investing can help you beat inflation if you invest as wisely as you can.

But let's talk about your number. Is that a number you came up with by looking at your entire financial picture? Don't just pluck a number out of the air. Figure out what's your "real" number when you factor in any pension you might have, your expected Social Security, debt, etc. If you pay off your house by retirement, you may not need a large number since about 30 to 40 percent of your monthly expenses is housing. Go to choosetosave.org. Click on the link for the Ballpark calculator which will give you a better idea of how much you need to save to have the retirement you want.

Why does having too little mean so much?

Because havign too little focuses your attention.  Takes a lot of your cogntiive capacity, your bandwidth, to attend to it, leaving you less mind for lots of other things in life.

 

Is there no audio here? My first time. I would rather listen than read.

So sorry. Just a text chat. Maybe one day we can do audio. But glad to have you for the first time. Hope you come back.

What did you think of the President Obama's comments yesterday about the wide economic divide? Do you think in the country we have too many stereotypes of the poor?

The divide in the country is one fo the widest in history, and it is not good for anyone.  Not even for the 1%.  No matter how wealthy you are, it's just better to be surrounded by others who are better off.  And the level of poverty, given the total wealth in the nation, is not only unfortunate, and immoral, but also unwise - reduces the national well-being.

As for the stereotypes of the poor - yes.  Too many, and often terribly misguided.  As we show in the book, the poor are often highly capable. They use their dollar better, more thoughtfully, than the rich.  And the stereotypes not only inluence how others see them, but also how they themselves feel.   I should add that those stereotypes are quite universal - not just an American thing.

And really many people are just a paycheck away from being poor. It's not about them over there. This economic divide affects us all. 

We don't live in that one reader's fantasy world: "Adults over the age of 20 make up 88 percent of all workers who would receive a raise if the federal minimum wage were raised to $10.10 per hour, according to an analysis of Census data by the Economic Policy Institute." http://www.epi.org/files/2013/bp357--federal-minimum-wage-increase.pdf

Yes, a raise of the minimum wage would beneft many.  And many of them have done the right things, and are there through no fault of their own, and trying their best.

 

unlike most people I hear about, I need to spend more. I have too much money sitting in my savings account. Any thoughts?

A savings account is just a location.  Do you have enough for retirement, etc.?  If so, kudos to you!   There are many good things to spend on, from pleaure for yourself and your loved ones, to help to the many many needy.  Enjoy.

If this is a serious question, look around. The need in this country is great. Start with your family, friends. Who needs help with college cost, transportation or food. If no one in your circle what about your community, state, nation?

I have no problem with people spending on themselves. You work hard for your money I suspect and deserve to treat yourself. But if after the treat and making sure you have an emergency fund, life happens fund, retirement savings and savings for college if you have kids, look to give. Help enrich the lives of others which is priceless.

I'm not sure I understand your research and how it applies to the everyday person. We are often told that money can't buy happiness. Are you saying it can?

Our research is not so much about happiness, as it is about having the mental bandwidth to attend to things in your life.  When you have enough money, you may be more or less happy, but you at least have the luxury not to have to worry about what you may not be able to buy instead every time you buy a coffee, or a sandwich.  When you don't have enough money, the constant need to juggle your finances occupies a lot of your attention, of your mental bandwidth.  And leaves less mental space to deal with long-term savings, taking your meds on time, eating healthy, etc.  It just imposes, in addition to all your other concerns, a "bandwidth tax." 

 

 

We can't, basically--or at least not without a lot of parental (free) care help over the first few years which to me is unfair to expect and unlikely to happen. Since we're both somewhat ambivalent about parenthood anyway, should this be a deciding factor? Or is that a cop-out, as many of my friends are telling me? We don't have a lot of debt, just jobs (that we like) that come with relatively low salaries in a high-COL area. My husband grew up without a lot of money and it was hard.

I think you are doing just the right thing. You are looking at such an important decision not just from an emotional point of view but financial. Yes, people will tell you there is never a "right" time to have a kid. But there is a wrong time. So run the numbers keeping in mind you may have to cut back on some things you like now. If you can cut and still live comfortably with the addeded expense of having a baby, then perhaps it's the right time. However, if the budget doesn't show you a way to do it without causing a great amount of emotional and financial stress it may not be the right time to have kids. Now I say that knowing that kids can grow up without a  lot of money and live great lives. But that may mean their parents have to make certain sacrifices. Are you ready for that? Meaning maybe moving, eating out less, few if any vacations, etc. Keep thinking this through until you are comfortable with everything involved with having a child.

Dr. Shafir, What do you think is the role of regulation in shaping the financial decision-making environment for the very poor? Or for anyone for that matter.

I think regulation and consumer protection are essential.  People simply do not have enough time and mental space to attend to the many intricacies of everyday financial life (which, betweeen us, are also terribly boring..).  Especially the poor are busy juggling, and have less professioanl help than the mor ecomfortable.  And everything else, on the periphery, gets less attention.  Unless we devise a system that's at least minimally helpful and protective, they will fall prey to costly erorrs from which many find it exceedingly hard to recover. 

Except for a spouse or other family member who you share expenses with, why would you even tell anyone how much money you donate to charity? Especially when you are being judged for it. I certainly would never consider it anyone else's business -- just like my income, mortgage payment, or anything else related to my finances.

Perhaps they weren't talking about specific amounts but the concept of giving. I talk about it a lot to encourage people to give of their time and money. It often comes up with me when folks ask me about tithing and whether they can "tithe" their time. The answer: You can give of your time but to tithe means to give a 10th of your income -- money. Churches can't pay their bills with your time.

What can be done using the principles you teach perpetuate poverty to get people out of that cycle? How can one best help others that are in that situation?

The poor are terribyl busy juggling the day to day.  This makes them less attentive to long-term and to less pressing issues.  They "tunnel" on the "now," and much of the rest gets neglected "until an easier time."  What's needed us help to plan and arrange things while you're busy tunneling on the now.  Take for example a short-term loan.  As the poor juggle their unstable incomes, they occasionally experience a great need for immediate money, to buy food, or pay rent.  So we need to make short-term loans available.  Now we can do one of two things:  Make low-interst loans available, to help me get over the immediate hump, and quickly recover.  Or we can make very costly high-interest payday loans available.  Those, once I take them, make me only poorer two weeks later when I need to pay a lot back.   I then need another loan, and I've entered a "poverty trap."  The point is this:  When I have a fire in my bedroom and there's a bucket of water nearby, I grab it.  I don't stop to inquire how much that bucket is going to cost me in 2 weeks.  What we need to do is make sure those buckets are available and affordable, and help the poor have access to them.

What I do and created in my church is a program to work along side folks long term to help them get way from their tunnel vision. I design workshops to get them to see how certain bad decisions cost them more money in the future. 

Our car is dying and it's the last year we can get a trade in. So we are biting the bullet and buying our car in cash. I never thought I'd be financially stable enough to do it, and I finally can with my husband. The shock is these dealerships are still stuck in the dark ages. Trying to sell us a price based on incentives that do not apply (we are not students or in the military) but then say okay it is really this high price since you do not qualify for incentives. Or basing a price on financing with the dealership and not actually wanting us to pay in cash. We had to go to a dealership about 50 miles outside of here to get a decent price and it still isn't ideal but this one was the only one who did not play games. Am I missing something? Isn't cash king - they'll get the entire price upfront! Why do car dealerships insist on this old business model?

Because it works. Because people don't wait and keep looking like you do. I've paid cash for the last few cars my husband and I bought. But here's what I do. I don't tell them I'm paying cash. I negogiate for the price of the car only. When they ask if I have a trade in or will be using their credit, I say that's a conversation for later. I focus just on the price of the car using a ton of research I've gathered from Consumer Reports, Edmunds.com and Kbb.com 

Then once I've got the price I think and know is fair, I tell them I'm paying with cash. I didn't get any push back. A funky look but no problems. I will say, when you pay in cash read the contract carefully. I found a $300 administrative charge in my contract, whcih was put there to administer the credit, etc. Made the dealer take it right off. Cash is still king!

We had to tell them we were paying in cash because they kept saying our price is contingent on you financing with the dealership. I know what you mean about the business model usually working - I did it before in my younger days and I shudder at how much I lost. Never again!

That's right never again.

And really they could have very well given you a good price without the incentives. Another tactic. 

Michelle, thank you so much for your work and good advice. I have a friend whose mother has been going through a tough time financially, and my friend helps support her. Over the past three or four years, my friend has asked me for help when she runs short. I don't loan money, and I have been happy to give her what she needs to make rent. This has not been a hardship for me. Thankfully, my friend has gotten a new job, and she has been making some new purchases, rather than saving (she has never been a saver). Although I understand her choices, I'm concerned that she will once again need help from me when an unexpected expense arises. Is it better for me to keep giving her money, or does that only sustain her habit of spending what she earns? I feel as if I might have become her "life happens" account. Many thanks for any advice you care to provide.

An interesting dilemma.  Perhaps you ought to try applying some "behavioral Economics" on your friend, to help her become a better saver.  For example, from now on, everytime you lend her $X, the condition might be that, say, 25% of X gets deposited in her (newly created?) savings account.  This way, you continue to provide her with your wonderful and friendly help, while at the same time helping her create her own savings..

OR (smile) you stop enabling your friend to practice bad financial habits. I suggest you stop being her life happens fund. You would be a better friend by NOT rescuing her. Because when you step in you don't allow her to do what she has to do, which is to save and not shop. She knows you are a backstop so consciously or unconsciously she doesn't have to do better.

Take her to a financial class. Give her a financial book. Show her how to fish financially, so she can feed herself financially in the future. Because if one day you can't help, what will she do then?

P.S. Looks like she's learned from her mother. She helped her by giving what she didn't have. Now she's doing to you what her mother does to her. You never take your rent money to give even to your mama. It's the tried and try advice about the oxygen mask on the plane. You have to put the mask on your first, otherwise you may pass out and you then you can't help the person next to you. 

 

Lots of available buckets don't help if you never have the bandwidth to address the cause of the fire. Do you have any ideas, based on your theories, about how to structure products or education interventions to help people move beyond the trap? I'm trying to understand the link between your research and practice.

That's right.  Buckets are not enough.  But cheaper buckets leave you with a bit more at the end of the month.  And with  a bit more you can start to do some more thinking.   Thereis no magic solution.  But there's need fo ran awareness that one thing that hampers the poor is a lack of mental space to plan, to arrnage things better, etc.  I am reluctant to suggest that this ought to be left for the poor to do on their own - the whole point is that they are overwhelmed as it is.  It is a combinaiton of awareness, and good and well-intentioned products -- from friendly and trustworthy banking, to reliable transportation to reliable childcare -- that make the everyday juggling just a bit more manageable.  That, in combination with the inherent capacity and insight of the poor, can make a lot happen.   

I've always been a saver, but in my early 20s I let loose a little bit, and didn't save as much as I could have saved. I then took on debt to go to graduate school in my late 20s and in my final year I miscalculated my spending needs and "underborrowed". Once I learned of my mistake at the start of the January term I didn't run the heat above 50 (seriously) and I ate a lot of ramen noodles. I took that found-again frugality into young adulthood and paid down debt, invested, etc. So now I have quite a bit, but I tend to have that scarcity mindset. Maybe I'm missing the point but having that scarcity mindset is a little damaging. Life is an amazing gift and sometimes I think I'm letting it pass me by because I'm constantly trying to figure out how to save more (i.e., spend less). So I can only imagine what it's like for people who have no choice but to do that.

At leaast you have choices. Your next step is to relax. If you are doing the best you can with your resources you know have to replace fear with faith. You are faithfully saving, not live a little. Pick something you like to do and that you can afford and do it. 

And you are right, it's much harder to not have especially in a society where it's all about the haves.

I bought a new car in March of this year. I dealer-financed to get the $750 incentive, after I had confirmed with the finance company that there was no pre-payment penalty or other such thing, and then immediately off the loan with the cash I had saved to buy the car,. It was a pain to re-title the car, but in the end, it worked out OK.

Glad it worked out for you. But I fear some might have just let the financing stay. 

What advice would you give for us and to give to others including our children to avoid falling into the scarcity trap?

What leads to the scarcity trap is finding oneself with not enough.  So try to always leave some slack - some time free to handle unexpected events, some money availabel for unexpected financial "shocks," etc.  The challenge, of course, is that leaving some slack, some resource (money, time) unused is counterintuitive and challenging when it feels like there isn't enough of it, but the point is that this is when you need that little extrea slack the most!

Got to run, thanks for all the excellent questions.  A wonderful conversation.  All best, Eldar Shafir


Me too. Got to get to my Sunday column.

Thanks for joining me today. Great comments. Hope you got some good insight to your questions. 

Please come back next week. 

If you don't already, follow me on Facebook and Twitter @SingletaryM

In This Chat
Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Thursday and Sunday. Her award-winning column is also carried in more than 120 newspapers. In her spare time, Singletary is the director of a ministry she founded at her church, in which women and men volunteer to mentor others who are having financial challenges.

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