Heuristics and Biases

The title of this post comes from one of my favorite books on my favorite topic, behavioral finance.  Heuristics are mental shortcuts (not always rational ones, though they seem rational to us) that affect how we think about and behave with money.

This keeps me on the prowl for mental shortcuts I might be making or biases I might have.  One example is the difference between what I think (through quick mental calculation) that I spend on something vs. what I actually spend on something – like most people.  Here are some differences I found in my Mint.com trends today.

Air Travel
I think I spend a lot more money on air travel than I actually do.  In my head, I add up the domestic flights I take at about $300-$600 per flight, with one or two $900-$1,400 international flights thrown in, and I easily arrive at about $4,000/year. But I’ve actually spent less than $1,500 on air travel in the past 12 months, which includes all of my plane travel through the end of 2008.

Food
This is tricky: I am sure, very sure, that I spend a lot more money than Mint.com says.  I think I have a good sense of when I’ve been eating out too much and not packing my lunch enough.  But, I’ve only recently started tracking cash expenditures diligently again so I have to trust what Mint.com says for now.  I know a lot of my “ATM Withdrawals” are for food.  Let’s see if I’m right in another month or two.

For May 1 through July 1, 2008 I spent $893 on Food and Dining; from July 1 through September 1, I spent $827.  That’s oddly even keel.  I will bet myself a non-Friday cup of coffee that I spend at least an additional $800 month in cash on food expenditures – eating out, groceries, coffee, wine.  We shall see.

Shopping
This was an easy one, and my mental assessment of “I am bleeding money out of all pores” was dead on.   From May 1 through July 1, 2008 I spent $173 on shopping.  From July 1 through September 1, I spent $647 on shopping – almost exactly $500 more.  And remember, my Mint.com Shopping category doesn’t count the $663 for 50% of the blinds for my condo, which I classify as home improvement and maintenance for my tenants.  This means that, more accurately, I spent $1,310 shopping for the past two full months – without cash expenditures taken into account since I wasn’t tracking them.

I mean YOWZA!  That’s BAD.

Of that $500-more-than-usual that I spent in August…

• $86 was in the Books category (now you see why I’ve banned myself from book buying for the rest of the year)
• $127 was in the Hobbies category (AKA the I Love Fancy Knitting Yarn category), and
• $424 was in the Clothing category.  Now, you’d think I’d have a whole shiny new wardrobe to show for that, but you’re wrong, because one item was a $190 pair of jeans.  Hey!  At least I ADMIT it!  I’ll even tell you how I rationalize it: “But I would think nothing of spending $190 on a fancy dress for a wedding that I would wear once, and I wear jeans every day, so $190 seems strange only because it’s jeans, but it’s far stranger to pay $190 for a dress you wear once, right?  I also bought my now-worn-through pair expensive jeans in 2004, and now it’s 2008, so I need this new pair because I wore almost no jeans except the first pair of fancy jeans and, because I did that, buying another pair of $190 jeans is OK.  If I spent $50/year on jeans every year and multiplied it times 4, you get $200, which is what I paid for one pair instead.” See how that goes?  I don’t even know if that qualifies as a mental shortcut; I think it probably just counts as meaningless crazy babble.  And to think they’re going to give me a Ph.D. in May…

Car Share (Transportation)
Like air travel, I also over estimate how much I spend on my car share program (since I do not own a car and, fortunately, have not owned a car for nearly five years now).  I feel like I spend about $100/month on car sharing, but… I am happy to report that Mint.com tells me I’ve spent just $217 on car sharing from May 1 until the present.

To be honest, this number does not reflect our household level of car share use (Mans pays for his too) but this is what I personally have spent.  And so, every time MUNI hates me and crushes my spirit, and I am tempted to buy a car, I will say “$217!” to myself.  A few years ago, $217 was two months worth of car insurance alone! As long as I can get away without having a car, I will continue to do so.

I wonder why I over estimate transportation costs (air travel and car share) specifically… I’ll mull that over…

Oh, how far the mighty have fallen.

Or, Why I Do Periodic Financial Check-ins And Apparently Need To Do Them More Often.

In my post of May 27, 2008 I had $12,000 in three savings accounts – a Roth IRA and two basic savings accounts (my credit union and ING). As of today, I have made no headway (except in retirement savings in my work account, which have increased by almost $3,000 since May).

But it’s worse than not making headway: I’ve had the dreaded backslide. Those same three savings accounts now total $10,017 – a reduction of almost $2,000!

This is bad.  This is very, very bad.  So what’s the emergency remediation plan? And it IS an emergency remediation plan.  This is my own personal Superfund Site, right here.

• Every single rent check for the rest of this year is going into savings, for a total of $4,500 by Dec. 31, 2009.
• This will be in addition to my usual savings deposit of $250/paycheck, for $500/month or $1,500 total by the end of the year.
• More importantly, I will NOT touch my savings.  Once I started doing that (for faux wood blinds for the house) it became too easy to just clicky clicky on the big old ING “transfer” button.  No more.
• Everything I wrote in yesterday’s post.

Old habits die hard.  I’m just so disappointed in myself, and that the habits I worked so hard to change for a year are rearing their ugly heads again.

“You made me promises…

I knew you’d never keep!”  Oh how I loved dancing to that on Tuesday nights at Industry in poor little Pontiac, MI.  And it’s so very me right now.

Did I say I was back on the wagon?  I did.

And then… Did my best friend come to town to visit me?  She did.
Does my best friend have cancer?  She does.
Do we ever have any idea of how much time we have left together?  No.
Does anyone?  No, but we’re more mindful of it than usual.
Does this affect my spending?  Absolutely.

I think absolutely nothing of buying a tee when she buys a tee.  Or the $39 dress we both fell in love with today, so we both bought one.  I think nothing of paying $150+ for car share hours so we can drive to the Napa Valley, Stinson Beach and Muir Woods, or eating out daily.  And do I expect to regret a penny of this?  Never.  I could lose my job tomorrow and I still wouldn’t regret the time (or money) I’ve spent with her.  Every moment is perfect, but all moments are really.  Each moment is ephemeral and perfect.  And if some moments involve spending money, that’s fine by me right now.  Many of them don’t.

Still: After my friend returns to the Midwest, I need to buckle down.  I respond to rules I set for myself, so I’m going to lay them down and commit them to binary here, so I’m accountable to anonymous others:

• I will not buy new clothes or shoes for myself for the rest of the year (underwear and socks being the only exceptions).
• I will not buy any new shampoo, conditioner, salt scrub, sugar scrub, scented oil, or other lovely smelling but unnecessary product until my existing product is gone, gone, gone.
• I will not purchase any books for myself for the rest of the year.
• After I pay off my credit cards (during the next cycle and in full, per usual), I will not use them for anything except plane tickets or other Southwest purchases (which get me Southwest points to visit family).  It’s getting to be a little too easy to swipe that plastic again.
• I will resume taking my lunch to work at least three days per week.
• I will resume buying coffee (vs. taking my own) only on Friday mornings.
• I will resume putting at least $1300 of each rent check, and $1500 if possible, directly into my savings account, rather than spend them (as I did with the first one).  Exceptions are major purchases like vacations and home improvements, which is the same rule I followed last year (i.e., it’s better to use cash to pay for vacation than charge it up)

This I vow.