The writer of Proverbs stated, “There is that maketh himself rich, yet hath nothing: there is that maketh himself poor, yet hath great riches. (Proverbs 13:7)”.
Craig Matters reminds us to “…use technology as a substitute for willpower by having funds automatically deposited into retirement or other savings and investment accounts.”
Ronald T. Wilcox explains why automatic deposits work by reminding us that when it comes to relationships it may be better to have loved and lost than never to have loved at all, but when it comes to money “it is better to never have loved than to have loved and lost.”
J. Money advocates a strategy called “Hide Your Money from Yourself” that involves setting up an automatic deposit at a bank that is inconvenient for you to get to, and not activating online access. The idea is to make saving easy and withdrawal a pain.
The underlying strategy behind all of these great ideas is creating artificial scarcity in your financial life. I can already hear the howls of protests. Why on earth would it be a good idea to create artificial financial scarcity when we already feel like money is too scarce? Glad you asked.
Rich Wasps and Poor Bees
I have a complex relationship with bees. For as long as I can remember I have been terrified of them. Indeed, if I were ever led into “Room 101” of the “Ministry of Love,” where in George Orwell’s novel 1984 your worst fear awaits you, there is a good chance I would be met by a swarm of angry bees.
And yet, the more I learn about the inner workings of a beehive the more fascinated I become. It is amazing what these tiny creatures can accomplish with each of them working hard and fulfilling their role.
I recently learned that my friend Kip, a loyal reader of this blog, keeps bees. When I found out that another friend of mine, David, was thinking about getting into beekeeping I arranged for Kip to show David his bees. The question was, would I also go?
My fear and fascination battled and in a split decision fascination won, and my daughter Savannah and I decided to go.
It was a good choice. I mostly kept my distance from the hive but I learned a lot. I love honey, so one of the highlights was eating honey and beeswax straight from the honeycomb. Delicious!
As I was leaving Kip said that maybe bees could teach me something about money that I could use in my blog. I am happy to report that he was right. Not long after seeing Kip’s bees I ran across a fascinating story about bees in the book Scarcity: Why Having Too Little Means So Much by Sendhil Mullainathan and Eldar Shafir that helps explain why we might want to create some artificial scarcity in our financial lives.
Among their many talents bees are master builders. Mullainathan and Shafir report that when building honeycomb:
“The bees create walls that meet at a remarkably precise 120 degrees, forming hexagons that are perfect to the eye. Each wall is less than 0.1mm thick, with deviations of only +/-0.002mm. That’s a 2 percent tolerance – not a bad building standard. By way of comparison, the National Institute of Standards and Technology allows a 10 percent tolerance in the width of manufactured plyboards used in construction.”
Mud dauber wasps are similar to bees in many respects, and their nests have a similar concept and purpose. However, the wasps’ nests are sloppily built with lots of wasted space and material.
The bees are elegant and precise builders while the wasps are sloppy and wasteful builders. Why is that?
Mullainathan and Shafir believe it is because of the scarcity or abundance of the building material used. Bees build their honeycomb out of beeswax, a substance that is extremely expensive for them to produce. Writing about where the wax comes from the authors report:
“Young worker bees gorge on honey and excrete tiny specks of wax. The exchange rate is steep: each pound of wax requires eight pounds of honey, which requires more than ninety thousand individual bee trips to collect nectar from flowers. The wax is collected in small clumps while the bees cluster together and use their body heat to warm it so they can mold it. Bit by bit the bees put these pieces into place to create the tile work that makes honeycomb.”
To a bee wax is too precious to waste. The bees are elegant and efficient builders because they have to be.
Wasps, on the other hand, build their nests out of plentiful and easy to get mud. With a seemingly unending and cheap supply of building material there is no need for them to be efficient. Wasps are sloppy builders because they can be.
Like bees and wasps we tend to build efficiently when money – the building material of our financial houses – is scarce, and wastefully when it is abundant. For a recent example of someone behaving as if money were as plentiful and easy to get as mud, consider the case of actor Johnny Depp. Court documents indicate that Depp spends $2 million per month to maintain 14 houses throughout the world and fly his private jet in between them.
Perhaps the best example of how inefficient Depp is with money is that he spent $3 million to fulfill his friend Hunter S. Thompson’s wish to have his ashes blasted from a specially made cannon and spread over Aspen, Colorado. Predictably, Depp’s extravagance has finally caught up to him and his poorly built financial house appears to be in the process of collapsing around him from its own weight. Depp is in bad need of some artificial financial scarcity.
The Focus Dividend
Why is scarcity necessary for efficiency? Because scarcity demands our focus like nothing else can. The authors call this the focus dividend.
Think of a time when you had a deadline approaching. The deadline focuses your attention, and you are able to accomplish far more in a short period of time than you could without the looming deadline.
So why not just set an artificial deadline before the real deadline? If you have ever tried this you have probably discovered that it just doesn’t work very well. You know the deadline is not real, so it fails to capture your attention. The authors compare this to trying to tickle yourself. It just isn’t very effective.
Fortunately I have found that creating artificial financial scarcity works much better than creating artificial time scarcity. This is particularly true if you use technology to create the scarcity before you ever get used to having the money. In my experience it is fairly easy to create enough artificial financial scarcity to focus your attention on using the remainder of your resources more efficiently.
The Importance of Slack
After freeing up resources by creating artificial financial scarcity, your next decision is what to do with the “extra” money? You could pay off debt, save for a major purchase, invest for retirement, or increase your charitable giving. There is certainly no shortage of worthy things to use the surplus on, and if you continue creating artificial financial scarcity you can eventually do all these things. However, the first thing you should do is to create some financial slack – also known as an emergency fund.
The authors of Scarcity provide a wonderful example of why creating slack is so important. The example is about managing scarce operating rooms at a hospital but it can teach us a lot about managing our money.
St. John’s Regional Health Center in Missouri had a difficult time scheduling their operating rooms. They performed about 30,000 surgeries a year in their thirty-two operating rooms, and the rooms were always fully booked.
Everything worked fairly well until an emergency surgery was needed. This pushed all the scheduled surgeries back leading to the operating room version of a traffic jam. Doctors were forced to wait hours to perform surgeries and the operating rooms sometimes were used until the wee hours of the morning. Something had to change.
To address the problem the hospital brought in an outside consultant who recommended creating some slack in the system by reserving one operating room for only emergency surgeries. Of course, this slack came at the high cost of one less operating room for scheduled surgeries.
The recommendation was not well-received by the hospital staff. One of the surgeons, Dr. Kenneth Larson, remembers thinking, “We are already too busy, and they want to take something away from us. This is crazy.”
Dr. Larson’s thinking made sense if the hospital really had a shortage of operating rooms. Instead, the consultant had identified the real problem as the lack of a plan to handle emergencies.
The change was made on a temporary basis and the results were impressive. Almost immediately the hospital was able to handle 5 percent more surgical cases in less time than before the change. After only a month the change was made permanent.
The implications for money management should be obvious. While we might feel that money is scarce, and that creating more scarcity would be “crazy,” if we use the artificial scarcity to create some financial slack it will allow us to use the rest of our resources better.
Like emergency surgeries, money emergencies happen. We don’t know what they will be, or when they will happen, but we can be certain they will happen. Creating a plan to deal with them by setting aside some resources just for emergencies will allow the rest of your budget to operate smoothly and efficiently. Perhaps that is why a recent study found that the amount of liquid wealth you had (financial slack) was more highly correlated with both financial well-being and general happiness than other measures of financial success such as income, spending, or debt.
Beware the Bandwidth Tax
Earlier we learned that scarcity creates a focus dividend that allows us to use scarce resources more efficiently. Unfortunately, this focus dividend is not free. It comes with what the authors call an accompanying bandwidth tax. While we are focusing our attention on the scarce resource we are neglecting other things that also need our attention.
This can happen with the poor, or with people who are not poor but create too much artificial scarcity. The bandwidth tax is especially dangerous for those sacrificing a lot to reach financial independence. While financial independence is a worthy goal too much focus on it can create an unbearably high bandwidth tax. Some sacrifice is alright but don’t forget to periodically evaluate how much bandwidth tax you are paying by neglecting other important things.
Abundance Carries the Seeds of Scarcity
I am intrigued with the relationship between abundance and scarcity. Just as “pride goeth before the fall”, squandered abundance goeth before scarcity. As Mullainathan and Shafir put it, “abundance …seems to have in it the seeds of eventual scarcity.” Johnny Depp is learning this painful lesson right now – hopefully not too late.
The key is to manage abundance by creating the right amount of artificial scarcity to allow you to build an efficient financial house without paying an excessive bandwidth tax. This will also provide some slack to deal with financial emergencies and save for the future.
Creating artificial scarcity when times are good will allow you to build a strong and beautiful financial house, like a beehive, instead of a sloppy and wasteful one like a wasp’s nest. While making money scarcer in your life than it already is might initially strike you as crazy it is the wisest financial move you can make and the key to building a financial house that will stand the test of time.