Create the Best Budget by Thinking of Your Money As Someone Else’s
Giving advice is easier than taking it . You tell your friend that she really needs to get rid of this jerk, but at the same time, you cannot end the relationship with your own jerk. Most of us have been there, and this dynamic is especially relevant when it comes to money. According to recent research, we may overestimate the value of our own money over that of others.
New research published in the Journal of Consumer Research suggests that we place more value on our own purchasing power. In the study abstract, the researchers explain:
“Nine studies show that people believe their money has more purchasing power than the same amount of other people’s money. Using a wide variety of products, from socks to watches to candy, we found that participants thought that the same amount of money could buy more if it belonged to themselves and not to others – a pattern that has spread to unwanted foods. … Participants also believed that their money – in the form of donations, taxes, fines and fees – would help charities and governments more than money from others. ”
In one study, researchers asked subjects to guess how many different types of food they could buy for $ 50, from socks to paper towels to frozen pizza. They asked the other group the same question, but about someone else who had $ 50. Overall, the participants thought that more things could be bought with their own money than other people’s money. (This was even true when they were paid to answer correctly!)
This seems like a harmless enough bias, but can be problematic when it comes to managing your money or planning your expenses. For example, if you are calculating how much you need to retire, you might think that your savings will take you further than it actually does, so you are not saving as much as you need to. The study offers another example:
“… despite the fact that their friends barely saved $ 100 a day on a recent trip to Barcelona, vacationers can save money on themselves – and be unpleasantly surprised to find they are running over their budget.”
Simply realizing this bias can help you look at your money more objectively, but you can also try to distance yourself from it. One way to do this is to present it as someone else’s. For example, how much would you advise a friend to spend on a trip to Barcelona? The researchers conclude, “We found that presenting one’s own money as distant (versus close) reduces the difference in perceived purchasing power among themselves.” If you want to manage your money more objectively, you can think of it as someone else’s.