Motivational Mental Accounting: Work More, Play More?

Tuesday, September 2nd, 2008

After a busy long weekend*, I am now a PADI Open Water “certified diver”. It was nice to check off a “To-Do Before You Die” item, although it did cost nearly $500 if you include all the related costs. The cool thing was that while talking with the dive shop folks, I learned that they needed some website help, and they were willing to pay me with some free dives/gear in exchange. Barter! This was interesting, because diving is a very expensive hobby. I was mainly looking to dive the Great Barrier Reef someday, but now I might be able to dive even more than that.

Now, I can directly exchange (extra) work for play. This begs the question: Is it a good idea to use your desire for something enjoyable in order to motivate yourself to work harder? For example, you may try to follow all of the common advice:

• Pay off all credit card or consumer debt.
• Have emergency funds for cushion.
• Spend less than 30% of income on housing.
• Max out your 401k and IRA.

For most people, this doesn’t leave all that much left for other stuff. At the same time, most of my friends are so tired from the daily 8-5 grind that they have no interest in doing anything “extra” for more money. This might be as small as doing a paid survey for a few bucks, or as big as starting a new business on the side.

When I start lacking motivation, sometimes I try and focus on something short-term and luxurious that I want. In the past, it might have been a gadget. These days, it’s mainly an experience like travel or some sort of lessons (ex. ski, scuba, flying). I tell myself “$1,000 will buy me a flight to Thailand.” I am starting to label my “real job income” as taking care of the current basics and the long-term future (retirement), while my side income pays for the “fun”.

Does anyone else do this? Isn’t this another form of mental accounting? If money is fungible, then you can’t really assign labels to specific income sources. To me, it is using mental accounting, but I’m twisting it to my advantage.

* I was going to use the term “action-packed”, but given the circumstances I just hope all the Gustav-watchers are safe and sound.

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Combining Maslow’s Hierarchy of Needs & Personal Finance

Monday, September 1st, 2008

You may or may not be familiar with Maslow’s Hierarchy of Needs, which is part of one theory explaining human behavior by psychologist Abraham Maslow. It suggests that there are five general levels of needs: Physiological, Safety, Social, Esteem, and Growth. These are often represented as a triangle due to their priorities. Lower needs must be satisfied before the higher needs can be addressed. For example, one must first obtain food and water (physiological) before worrying about what might happen if they get in a car accident tomorrow (safety). It’s just a theory, but an interesting one.

While not all of these needs can be explicitly bought with money, it’s not too much of a stretch to see the relationship between this triangle and finances. We usually worry about paying for rent and food first before worrying about giving to charity or that long distance telephone bill.

In the book Retirement Income Redesigned, the authors make a close correlation between the hierarchy of needs and planning for retirement. Here is a figure from the book:

The new levels:

• Survival income. How much do you spend simply to survive?
• What-if income. You will want to protect your life. This could mean health care costs, health insurance, and/or proper portfolio planning so you don’t outlive your money.
• Freedom income. Money needed to do the things that bring joy and fulfillment to your life. Could be travel, education, or fine wine.
• Gift income. Money for people and causes that deserve your help. This is the replacement for “love”.
• Dream income. This is the elusive “self-actualization” level where you find true happiness and meaning.

By breaking down your income needs, this could be another way to track your progress towards financial freedom. You can make covering your bare necessities your first smaller goal, and move on from there.

Or if you have a short attention span like me, it could be a way to mentally organize your everyday spending.

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