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Tricks Our Minds Play With Money

When is $10 not worth $10? – Only when you think it isn't!

Every Saturday morning during the school year, you spend three hours helping out with swim lessons at the community pool. You get $8.50 an hour. You have not been able to sleep in on Saturday, but being an assistant swim instructor pays better than other jobs you could get. You feel you work hard for your money.

You need a new MP3 player/alarm clock. You are all set to buy one in a nearby store for $39.95, but you notice an ad in the paper for exactly the same brand and model across town for $29.95. It's no contest. You travel across town to make your purchase. You can save $10. That's more than an hour's work.

You also need a new computer. You've been watching the newspapers, and the one you want goes on sale. SuperBuy, a nearby store, advertises the computer for $1,099. BetterBuy, a competitor located 5 minutes further down the road than Superbuy, is selling the computer for $1,089. Where will you shop?

Interesting isn't it? In the second example, the $10 doesn't seem so important. Well, you say, as a percentage of the purchase price, it's not as big a number. True, but was that $10 any easier to earn than the $10 you saved when you bought the alarm clock? Did you get to sleep any later to earn it? No. Yet if you were like most people, you were ready to spend it rather than save it.

Easy money is more easily spent

You have two out-of-town aunts who send you money for your birthday. Each sends you $30.

What do you do with each $30 gift? Do you blow it? Sure I do, you say. Why? Because I got it free. I shouldn't have to save it right? They gave me a gift. I just turned their money into a "thing."

So now the question becomes did you buy something you really wanted or, as often happens with gift money, did you look for something to spend it on? Somehow, gift money seems less real, less valuable, because you didn't work for it. So rather than hang onto it, people spend it. (Adults sometimes do this with income tax refunds. It's money they really worked for, but because they get it "back," it seems like a "gift."

Wait a minute. You're the same person who drove across town to save $10 on a MP3 player/alarm clock. And now you are throwing away $30 on something you could have easily lived without.

So here's a second trick our minds play: gift money isn't as valuable as worked-for money. The truth is that money has the same value no matter where it comes from And here's an interesting question: if you didn't have to work for money, why isn't it easier to save it?: Why doesn't it just pass through your hands from the birthday card to your savings plan? It could be an effortless transfer.

Let's say that for 10 years, you used Aunt #1's check to buy something important to you. Sometimes you saved and added money to her gift to get something you really wanted. But you always saved Aunt #2's check, so after 10 years you have $300 you didn't work for! That's pretty darn cool. It came from respecting gift money.

Tom Gilovich author of Why Smart People Make Big Money Mistakes and How to Correct Them, tells us, "We all tend to make better decisions about money when we consider the value of money all by itself, no matter where it came from or how we got it."

Small amounts aren't worth saving

The first year you worked at a neighborhood park, you earned $6.75 an hour. The second year, you got a 75 cent-an-hour raise. Doesn't sound like much, does it?

But if you do the math based on a 30-hour work week, you're earning $22.50 more each week, or $90 more each month. Over three months, that's $270. If you look at it as only 75 cents an hour, you might not think about putting that 75 cent in your savings plan rather than spending it. You could just say, 75 cents—big deal. I may as well spend it.

You'd be wrong. In fact, if you could live with the same amount of spending money during summer #2 as you did during summer #1, you could save all $270. If you respect even small amounts of money, they can turn into large amounts.