Every dollar is worth the same

Spend less on big ticket items to score more little indulgences

If you ever study how humans behave around money, you’ll learn that we are not entirely rational. One glaring example is that we tend to view things in terms of proportion, rather than absolute numbers.

So, for instance, consider a shopper (let’s call him Bob) who is in the market for a computer. The first store he visits has a certain model for $999. He learns that a second store, a short drive away, has that same model for $975. What does Bob do? He’s highly likely to view that as no big deal. He will just purchase the computer where he is.

But if Bob were shopping for pencils, and he visited a store that charged $27 for a set of pencils that ran $3 somewhere else, Bob would likely be furious. He would yell about highway robbery and be running over to the cheaper store as fast as he could. This is true even though that $24 difference is worth the same no matter what you’re buying. We often shunt money into categories in our brains, but every dollar is worth the same no matter where it is.

More fun money

This realization is important because it turns out that moving money into certain categories can make a huge difference in life satisfaction. An extra $50 a month as part of your rent or mortgage payment may not seem like a lot, but adding that extra $50 to your fun budget each month means you could go get a pedicure two more times, or go out to lunch two more times, or hire a sitter for another few hours. All of these repeated bits of entertainment might boost life satisfaction a lot more, over time, than whatever you are getting for the extra $50 spent on your housing.

One reason fees on mortgages and home closing costs in general are what they are is that banks, real estate agents, and tax officials assume that people are spending so much money on their home purchases that they won’t fight about a little bit extra in the process. But a $500 fee that gets tacked on at the end of a negotiation could have paid for a long weekend trip. That’s a real source of pleasure. Paying a bank more than you need to? Not so much.

Be different

In general, I find it’s better not to automatically shunt the “normal” proportions of income to various categories in a budget. By making slightly unorthodox choices, you can do things that might seem indulgent.

For instance, if it is possible, spending 20-25 percent of your income on housing instead of 30 percent would allow for a lot of travel or dinners out or entertainment. In my book All the Money in the World I look at wedding spending in particular. Floral arrangements are indeed pretty. But spending big bucks on flowers (or a particular venue, or catering, or attire) for one day might do less for marital happiness than spending that same quantity on date nights or outsourcing or even grocery store floral arrangements during the busy years of young kids. Spending a lot on wedding flowers is considered normal — but not doing it opens up a lot of future possibilities.

In any case, as you think about how you spend your money, it might help to consider if moving some cash out of the big categories could open up a lot of flexibility in the small ones. Every dollar is worth the same. Just because some budget proportions are normal doesn’t mean they’re right, or that they’ll maximize happiness.