Wednesday, 1 February 2012

New Year’s resolution: Be financially-savvy

In the last two posts, we looked at New Year’s resolutions many people make: exercise more and boost your career. Today, we will look at a third one: be financially savvy. The goal is to eventually be better off financially. In this context, many people think of clever investment strategies. However, a key element of improving one’s financial situation is simply spending less. It is not easy with the media and our peers continuously awakening needs in us. But once more science has some ideas for us as to how we can spend less money.

Michel T. Pham from Columbia University and his colleagues Iris W. Hung and Gerald J. Gorn found that being relaxed makes us spend more money. In a series of studies, they induced relaxed vs. non-relaxed states in altogether several hundred students and had them judge the monetary value of different objects. Result: those in relaxed states assigned higher values to the objects in question, no matter whether they were ice-cream sundaes or bungee jumping experiences. They were ready to spend more money on them. Jonah Lehrer gives a more detailed overview on Wired. The original article can be found in the Journal of Marketing Research and is available for download on the homepage of Columbia University. Thus, making financial decisions in a non-relaxed state might be better if you want to save money.

Another idea is to increase your income, for example when talking about your salary. A study by Todd J. Thorsteinson from the University of Idaho revealed that the number initially mentioned when talking about salary sets an anchor for the amount of money finally agreed upon. This was the case even if the number was unrealistically high or low. The higher the number initially mentioned was, the higher was the salary agreed upon in the end. The original article was published in the Journal of Applied Social Psychology. Alex Fradera, who outlines the study on the BPS Occupational Digest blog suggests that you use a joke when coming up with a high salary so that you can set a high amount as anchor.

Thus, there are two things you can do in order to improve your financial situation: spend less and earn more. If trying to spend less, avoid making financial decisions in a relaxed state. When trying to increase your salary and asked to give a number, start off with a high one.

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