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When Money Is Scarce: Forced Frugality and Bad Decisions

I’ll be honest. When the idea for this article struck me late last night, I had a definitive idea of how I was going to address the topic of conservation mode. But the clarity of day may have changed what I think about the idea.

Throughout my life, I’ve been working with scarce resources. Now, not as scarce as most people living on this planet, but scarce in my environment. After college, time and money eluded me, as I was busy working for an organization that was unable to provide the compensation that would cover my living expenses, which were already low. Working with limited financial resources, I made some living choices out of necessity, like living in an apartment with a group of friends, crashing my newlywed friends’ guest room, and even moving in with my father in his significant others’ house. Talk about an imposition; he had only just moved in there himself.

When you have a new, full tube of toothpaste, if you’re anything like me, you’re more inclined to line the whole length of the toothbrush bristles with the paste when you brush your teeth. When you get to the end of the tube and start rolling up the end, you know a shopping excursion is on the horizon, and you know it’s almost time to spend another $4.00. The price isn’t even relevant, it’s just the fact that you’re running low of a resource. You may start lining only half the length of bristles with the toothpaste; after all, the dentist says you don’t actually need to use more than that.

The same behavior seems to be true regardless of the resource. In the bathroom alone, you use less toilet paper when your last roll is getting thin and less shampoo when the bottle is getting light. You easily adapt and made do with less — and less is all right in these cases. You’re not sacrificing quality of life by conserving toiletries.

But living in this scarcity mode does wear thin a little. You get tired of being low on resources, so you go to the store, replenish your supply, and start the cycle over again while flush and feeling rich.

I’ve found myself doing the same with the money in my checking account. I try to keep $2,000 to $3,000 in my checking account after my credit card payment is made. (I pay for almost all my daily expenses with a rewards credit card and pay off the balance each month.) Because my only consistent income is writing for this website, and because the company that owns it has been reducing the budget, my regular work income has been lower than usual. Therefore, it’s been increasingly difficult to meet my expenses while maintaining a buffer, as I’ve avoided dipping into my investments for income.

So I’ve been living life more frugally than one might expect of someone who sold a profitable business for a good amount of money. When I first started paying attention to my finances and learning about long-term investing, I figured I would need $2 million to retire comfortably and would have to work forty years or more to get there. When a financial planner asked me about my retirement goals recently, I couldn’t even come up with a good answer. On the one hand, I’m already retired — I have a higher level of assets than I ever expected and have no real pressure to work (except the pressure I put on myself) and I am free to spend my days however I want. But on the other hand, I don’t want to live off my assets just yet. I still have more to do, more to accomplish. I’m not done.

Also recently, in a different discussion, an investment manager asked me how much money I needed every month to fund my lifestyle. To be honest, I don’t know. I’ve committed myself as a volunteer to an organization, and my new responsibilities prevent me from living full-time elsewhere or even taking a good amount of time to travel. I still live in the same apartment I’ve had for the last eight years, the apartment I moved into when I finally conceded that my website was a business that was earning real money I could use for expenses. There may be a few indulgences here and there, like a regular massage and home grocery delivery (who really likes walking around a supermarket?) but this seems to be the extent of my extravagance.

So the threat of not being able to pay my monthly bills is something I put on myself. Maybe it’s because this is how I lived for so long, maybe the pressure keeps me aware of my situation. I could sell investments and keep a healthy amount of money between checking and savings, but that would mean watching my investment account decrease. And I’ve grown accustomed to it increasing for the last decade. Nevertheless, that’s likely going to be the plan this coming year.

I’ve believed that forcing myself to live more frugally than necessary is a good thing. Science may disagree with me. I’ve always understood that dealing with urgent problems prevents people from making solid decisions about the future. (See Why Some People Can’t Save: A Matter of Urgency.) However, there must be some benefits to living close to the edge. You’re on your toes, you’re not getting comfortable and lazy, and you keep your eyes open with hyperawareness.

When you have enough resources, your mind isn’t consumed with survival strategies. You are free to cogitate on a higher level.

Poor farmers in India actually perform better on cognitive tests at the end of the harvest season, when they are flush, than at the beginning, when they are running low on money. The effect? The equivalent of a 13-point drop in IQ. (Psychology Today)

We then completed a battery of studies where we saw that manipulating scarcity has an enormous impact on people’s cognitive capacity. First… we went to a mall in New Jersey where we asked people to complete tests measuring cognitive control and fluid intelligence, a component of IQ. We had them do these things while they were contemplating a financial scenario — something that’s manageable, requiring $150 to fix a car that broke down, or more demanding, requiring $1,500 in car-related expenses. We divided the participants by household income and found that the rich people in the mall did equally well on the cognitive tests, whether they were thinking of the challenging or the less challenging scenario related to the car. The poorer people in the mall were equally capable cognitively and did just as well on fluid intelligence as the rich when they were thinking about the manageable scenario. But once they contemplated the more challenging scenario, their scores went way down. Simply being preoccupied with this demanding financial challenge makes them perform worse. (American Psychological Association)

A person who manipulates his money to trick himself into a situation where resources is scarce is still someone who knows his problems aren’t serious. If resources are scarce out of necessity, decision-making skills are impaired. If resources are scarce but within control, as they would be for someone who has the resources but chooses not to deploy them, cognitive reasoning may be normal, but I would have to imagine that not using money that is available might raise a question on whether that in itself is a good decision.

What’s really bugging me, though, is the potential for a market correction. In the past, this wouldn’t have bothered me, because I was in an asset accumulation phase. I could take advantage of market lows and invest for the long-term. Now, I will be able to use a market correction as an opportunity to rebalance my portfolio, but it’s not the same as putting “new money” — income from working — into the market for the best long-term advantage.

It’s a waiting game. In a few months, I’ll have some more freedom to start new businesses, but I have to manage my expectations. I probably won’t have another business as lucrative as this website was for me. But I have ideas and I’m excited about putting them into action.

Do you force yourself into scarcity mode, or do you allow yourself more freedom? Which do you see as a better approach to long-term wealth building?

Photo: Flickr

Published or updated January 6, 2015.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 2 comments… read them below or add one }

avatar 1 Donna Freedman

I’d just begun to enjoy spending a little more (on myself, my partner, my relatives) when MSN Money kicked us all to the virtual curb. Now I’m back on tighter rations and it mostly feels okay.
Put another way: It’s because I’m careful with funds that I can afford to go to the Financial Blogger Conference (and this year the New Media Expo) and stay a little longer for a vacation. If I spent every dime I earned, I couldn’t do those two things without going into debt — and that’s not going to happen.

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avatar 2 Anonymous

Good article…scarcity can build creativity and frugality….one needs to keep a perspective of it and use it to reach the goal….

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