Have you ever noticed when you talk to older people and they complain about the costs of things these days? Perhaps you’ve found yourself thinking the same way when it comes to something. The reality is there is a very important reason for this. The value of money is ever changing.
Determining the Value of Money
Money by itself has no actual value, it is essentially a method of exchange. Over the centuries many other forms were used to represent stored value, but frankly it’s much easier to carry around a dollar than it is a cow. The problem with this arrangement is that the value of that dollar in your pocket changes constantly based on the number of dollars in circulation and others’ perception of the soundness of the items that back it. In the US dollar case, that backing is your perception of the US as it is backed by the full faith of the US government. The measure of this change is what is commonly called inflation or deflation.
Psychology and Numbers
Human beings are conditioned to anchor to numbers in a perception of size. You see this in young kids when they say which number is largest irrespective of the unit of measure. I see this often with my own child as he is forever asking if I’m bigger then his great grandmother. Never mind that it is not clear if he means older or taller. As you get older you learn that unit of measure makes a difference but your mind still defaults to the primitive perception of large numbers. This is especially true if the unit of measure is ever changing as is money.
Because of this when someone tells you they have a million dollars, the perception for those of us born back when a million dollars was rich is still to perceive that the person is set for life. This however is not always the case and is likely just enough. Mustard Seed Money had a great post on this a few weeks ago.
Lifestyle Inflation
Adding to the problem is the dreaded lifestyle inflations impact on your money perceptions. When you start dealing in 100s of thousands of dollars, 100 dollars starts to seem like peanuts. As you change your perception, your spending has a tendency to change as well. For some this can be to the point where you are spending all 100s of thousands of dollars.
Savings Inflation
I even see it in savings. As your Net Worth increases, a contribution to your stash of 100 dollars no longer feels significant or enough. This is especially true once your reach a point where the day to day oscillations of the market dwarf your 100 dollars.
What it All Means
So where does that leave us? Well, we have to do our best to put the current value of money in the context of the opportunity cost of it, not in the monetary value. When you go to spend $20K on a car, think about what you could use that $20K on later. When you reach 1 million dollars in savings, think about what type of income it can generate in retirement and how it compares to your expenditures. Finally, when you’re saving, remember that 100 dollars extra equates to another x number of hours of you not having to work later. These little tricks will help you keep in touch with the real underlying value instead of your perception of the numbers.
How do you perceive the value of money?
Thanks for the shout out!!!
I definitely have been anchored when it comes to money. I don’t know why but I don’t want to spend more than $0.50 for a soda out of the vending machine. It’s terrible and I feel like an old man saying that so I normally don’t get a soda anymore. Isn’t it funny what we get anchored to over time.
I have the same problem with snack machines. If it costs more the a dollar for the snack I walk away regardless of what it is.
I always enjoy talking to my dad about the prices of things back when he was a kid. He’s getting up there in age so things were considerably different back then. I suppose it will be the same for us 50 years from now if we are fortunate enough to still be here!
It does lend a rather interesting perspective when you realize a car cost 2-3 grand and a house was 12k 50 years ago.
The perception of money differs so much based pretty much how much money you make. When I was not making a lot of money I thought $100 was a lot and now that I am doing much better, $100 doesnt seem like a lot at all.
The difference is that although $100 may not mean a lot to me I still know that its financially smarter to only spend when I need to and not throw out the $100 on dinner just because I have it.
If I did that, I wouldnt have been able to achieve what I have today. By all means im not rich or anything but I understand that being smart about spending money is going to help me retire earlier then anticipated so ill just have to stick to my guns.
🙂
So true, you have to do your best to remember that 100 dollars is still meaningful.
That’s interesting because even at FI – I find $100 to be a lot of money. Maybe it comes back to never carrying cash around? If I have $100 in cash in my purse – it feels like so much money!
Could be. Everyone’s associations are different, they are just typically ingrained in some manner.