From Here to Financial Happiness

Day Seven Everything's a Tradeoff

If we purchase one item, we can't buy something else. If we spend money today, we can't save it for tomorrow. If we decide we want the big house, we'll have less for other goals, like the kids' college and our own retirement.

Our financial lives are a never‐ending series of tradeoffs: Every time we use our dollars for one purpose, we relinquish something else. There is, as economists like to say, an opportunity cost – and yet we often fail to ponder the opportunities forgone.

How can we get the most out of our dollars? Whenever we open our wallets, we should think not only about what we are getting but also what we're giving up. Unfortunately, this is often a struggle, for two reasons.

First, we get excited about the item right in front of us and make an impulse purchase. Our excitement is so great that it drives out all consideration of possible alternatives. One solution: Hit the pause button. We might impose a 24‐hour waiting period, or, if it's a large purchase, maybe a week or two. Even leaving the store for 10 minutes can help us ponder the choice with a clearer head.

But that won't necessarily solve the problem. Why not? There's a second reason we often fail to consider alternative uses for our money: We're hardwired to favor spending today over spending next month or next year.

Economists refer to this as hyperbolic discounting. Experiments have found that we'll happily take a small reward today over a far larger reward in a year – ...