The science of saving money … without crunching numbers

Updated: Dec 14, 2019

Saving money sometimes feels like quantum physics. Spendings. Income. Percentages. Balances. Here’s how to spend your money smarter without numbers.


Photo: Joao Silas

"How much did I spend on coffee this month? What percentage of my income does this add up to? How should I categorize that Paypal transaction to make sense? What does that 3,5 % of money I spend on books mean?" I'm definitely not a finance person – and sometimes, reviewing my bank-account can get quite overwhelming.


Undoubtedly, it’s important to do it from time to time. But when looking at this huge dataset of transactions, spendings and earnings at the end of the month, I sometimes feel like I have to become a data scientist in order to understand it. And I feel I'm not alone.


There’s some precise science concerning how to spend your money smarter.

A simpler strategy would be to grab the cause of these spendings by its roots. Controlling it, before it occurs. Luckily, there’s precise science concerning how to spend your money smarter. And it doesn’t consist of any numbers. It's behavioral economics. Dan Ariely and Jeff Kreisler look at the behavioral principles of money in their book Dollars and Sense: How We Misthink Money and How to Spend Smarter – and their findings are eye-opening.


💰 1. “Bonuses” are also just money.

Let’s say you get a 400 € bonus this month. Or let's say you get a 500 € tax refund for the previous year. Immediately, your brain will jump and scream “Yes! Free money! Let’s celebrate!” – and spend it on items you want for a dopamine rush.


But let’s be real. Money is money. If you got that 400 € over the course of four months – would you spend it differently? Would you then put the extra money into a savings account for a new flat or invest in your retirement fund instead?


It’s Casino psychology. Just because you win once, it doesn’t mean you immediately have to spend it. Let it settle. And think about meaningful ways to spend it. 


🛍 2. Sales are false friends.

Imagine you’re strolling around the city and you see this beautiful watch in one of the windows of a store. Even better, it says 60 % off – and instead of 1000 € it only costs 400 €. What a deal, right? You better drag yourself into that store and buy it immediately.


But wait.


You already own a glorious watch in which you wear on a daily basis. Moreover, it looks quite similar and a stranger might not be able to spot the difference between the advertised and your current watch.


So, does it even make sense to buy this watch? Did the urge to purchase it just slump a bit?


Why would you need this item only because it's on sale?

When you think about purchases, think about them in absolute terms. You’d still spend 400 € on it if you buy that watch. That’s 400 € more than you want. Sale-advertisements are tricky. They make you think about a deal only in relative terms. Admittedly, if you plan to buy an item anyway and you see it on sale – go for it. But if you wouldn’t have purchased it if it wasn’t on sale, there’s a logic error. Why would you need this item only because it's on sale?


🏷 3. Think in terms of value, not price.

You’re in the supermarket buying apples. And you have two choices: A regular apple and an organic one. The organic apple costs more than twice the normal one. Is it overpriced?


In reality, these two apples are not the same. You just can’t compare them. They're similar, yes. But not the same. And each one has its own value. If an organically grown, local apple is worth a certain value to you, it’s not overpriced. Even if the regular one might cost half that amount or even less.


An item is worth what it's worth to you. Always. Photo: Rajiv Perera

In its core, a price is just a numbered value. Therefore, instead of prices, compare what an item is worth to you and at least try to ignore your surroundings when doing so.


⚓️ 4. Anchors and frames.

In social science and psychology, there’s a theory called “Priming Theory”. It says that the first thing you look at in a certain context will influence how you perceive everything that follows. As Daniel Kahnemann explains it the following way in his book Thinking Fast and Slow: If you look at a picture of food and then do something else, you’re way more likely to recognize words like “soup”, “beans” or “meal” in your surroundings than if you had looked at another picture. 


And it’s the same for money. The first price you see for a certain item will shape your expectations for every similar offer to come. If you spot the new iPhone costing around 1000 €, a Samsung priced at 600 € won’t seem that expensive anymore. But when you first look at a Huawei phone for 200 €, the Samsung – and the iPhone even more – will seem hella expensive.


But there’s a way around it: Setting your own guidelines. In the phone example, this would mean that you might look up some of the prices of recommended phones on the internet before visiting the store.


How much is this thing worth objectively?

Or to give you another example from my own life: The expensive coffee in that hipster-ish coffeeshop won’t seem that expensive until you find out you can get the same coffee for half the price in the café around the corner. The question you’re trying to ask is: How much is this thing worth objectively?


⛵️ 5. Bind yourself to the mast (metaphorically).

In Homer’s book Odyssee, the ancient Greek hero Odysseus binds himself to the mast when passing the sirens, whose singing would lead any conscious sailor into a death-trap. But due to the fact that he bound himself to his ship, he saved himself from the sirens. This kind of forced behavior is also known as Ulysses pact.


When the decisions are automated, there’s no choice to make.

You can use Ulysses pacts to effectively manage your money. In fact, you’re probably already doing it. For example, in Austria, you automatically pay for your health insurance when you receive your paycheck. The money is automatically split off. And by setting up automatic payments for your emergency fund or your investments, you can create your own Ulysses pacts. When the decisions are automated, there’s no choice to make. The transfer will happen. No matter what.


💵 6. Use cash.

Giving away cash hurts. Literally. It activates the same type of brain cells that are activated when you feel physical pain. So when you pull out that 100 € note at the checkout of a store and feel kind of sad to give it away: It’s not just you. Giving away physical money literally hurts.


Yes. Spending money causes physical pain. Photo: JP Valery

However, humans wouldn't be humans if they didn't find a way to bypass this pain of loss: Credit card payments. You don’t feel the same kind of pain anymore when you pull out your credit card. And it really makes a difference. As Ariely and Kreisler found, people buy more stuff, leave larger tips and underestimate their spendings more when paying with a card.


Though, sometimes, increasing pain isn’t that helpful. When you’re on that vacation you saved up for the whole year, you don’t want to think about money. It logically makes sense to use your credit card in this situation. Maybe set a limit – but if you have the money and you're in this kind of special situation: enjoy yourself.


Money is more about psychology than numbers. It’s about how we look at things. Also, more money won’t solve these problems – it will just largen the sums a bit. Luckily, with the right awareness, those struggles are easily controllable.


If you now got interested in learning even more about the power of money – including investing, financing a business and gaining insights into the money habits of successful businesswomen: Visit our limitless conference on November 8th. It’s a one-day conference where you get the chance to learn from real experts, founders and investors.

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