“Because the pleasure of consumption is purest without the experience of paying for it, anything we can do to separate payment from consumption can enhance the pleasure of the purchase. – Elizabeth Dunn and Michael Norton from the book Happy Money
Close your eyes and reminisce seeing your favorite band in concert or watching a Broadway play you waited years to see. What was the experience like?
Undoubtedly the band was in top form and the play was captivating but part of the reason you have such fond memories of the evening is because you were likely required to buy your tickets months in advance. By the time the wonderful day arrived you not only had been anticipating how great it would be for quite some time, but you had long since paid for the tickets. This left you free to enjoy the magic of the evening without worrying about how you were going to pay for it. Both the anticipation and the prepayment increased your enjoyment.
While it is difficult to recreate the magic of a night like that we can squeeze more happiness out of our money by forcing ourselves more often to pay for things in advance, even when we are not required to do so. Thus the fourth principle of smarter spending: Pay now, consume later!
Paying is a Pain, Credit Cards are an Anesthetic
Paying is a pain! Literally. Neuroscience experiments show that when we part with our money the same areas of our brains are activated that are active when we experience physical pain. This means that paying the same time we consume can interfere with our enjoyment of the purchase.
To avoid letting the pain of paying interfere with our enjoyment two strategies are available. The first is to consume now and pay later, which solves the immediate problem of separating payment from enjoyment but leads to worse problems in the future.
Credit cards are the most frequently used tool for consuming now and paying later. Among the other problems associated with credit cards, they are so successful at numbing the pain of paying that they cause us to spend significantly more than we would otherwise spend.
In one study cited in Happy Money students were given the opportunity to bid on a pair of tickets to a sold out sporting event. Those who were told they had to pay in cash the next day bid an average of $28. Those told they could pay with a credit card bid more than double this amount, an average of $60. To make matters worse, these were not naïve college freshmen, but MBA students who should have known better.
Physical pain has a purpose in that it warns us that something is not right. This causes us to seek treatment or change the behavior that is causing the pain. The pain of paying serves the same purpose, and masking that pain by paying with credit cards is almost always a bad idea.
The Anti Credit Card
The second method to separate the pain of paying from the enjoyment of consuming is to pay now and consume later. Credit cards are successful because they make consuming now and paying later easy and temporarily painless. Is there a tool that performs these same functions for paying now and consuming later? I believe there is.
My favorite pay now, consume later tool is a modern twist on an old-fashioned product. I am speaking of online savings accounts.
Savings accounts have been around forever. However, imagine your grandparents walking in to the local bank and trying to open up 10 separate savings accounts. Unless they had a lot of money to fund each of the accounts with they likely would have been shown the door. Setting up and tracking accounts was labor-intensive and expensive for banks, limiting most people to a single savings account.
However, with my Capital One 360 online savings accounts I can quickly and easily open up to 25 separate savings accounts. Furthermore, I don’t have to fund a new account to open it. I can open the account with a zero balance and fund it later. A new account only takes 2-3 minutes to open and once you link your savings accounts with other accounts money transfers are quick, easy, and can be automated.
I like to think of my Capital One 360 accounts as an anti-credit card. Just as a credit card is perfectly designed to make it easy to consume now and pay later, 360 accounts are perfectly designed to make it easy to pay now (or at least save now) and consume later. Here is a link to a review of Capital One 360 Savings Accounts from Rockstar Finance.
Our online savings accounts include the following:
- Life Happens (Emergency Fund)
- Travel and Adventure
- Family Fun
- Car Replacement
- Micro Philanthropy
- Home Improvement
I recommend starting immediately by setting up at least a couple of pay now, consume later accounts to match some of your short or mid-term savings goals. Use your imagination when naming the accounts so the account names are meaningful and motivational to you. Then start saving.
When you reach your goal, enjoy the fruits of your labor guilt (and pain) free. Whether it is a vacation, a new car, or an evening out, paying in advance and consuming later will increase the enjoyment of your purchase.
Looking at the big picture, consuming now and paying later has a name. It is called debt. Paying now and consuming later also has a name. It is called saving. The fourth principle of smarter spending works because debt makes us unhappy while saving makes us happy. Online savings accounts are a powerful Happy Money tool because they make it easier for us to squeeze more joy out of our money by paying now and consuming later!
Note: This is the fifth in a series of posts inspired by the book Happy Money: The Science of Smarter Spending by Elizabeth Dunn and Michael Norton. The series will consist of an introduction and a post about each of the book’s five principles of smarter spending.