SPENDING SMART - Shell out on stuff you really care about; save on the rest

SPENDING SMART - Shell out on stuff you really care about; save on the rest
By Gregory Karp, personal finance writer for The Morning Call, a Tribune newspaper in Allentown, Pa
Copyright © 2006, Chicago Tribune
Published August 27, 2006

Do you buy only the best? If so, it should be no surprise that you're probably overspending--but not for the reason you might think.

It may stem from failing to measure your "psychological income," or the non-functional benefit from a purchase, especially a name-brand purchase. It represents how the product or service makes you feel.

That concept might seem a bit hokey, but it pervades the American consumer's life and is well-established in the world of marketing. Often the term psychological income refers to supplementing job income. For example, a social worker's income is paid in dollars and the satisfaction of helping people.

But PI applies to spending too. It's probably most obvious in car buying. All reasonably reliable automobiles will get you from home to work, for example. That's the functional component of the buying decision. Some will get you to work in more comfort, with a smoother ride, superior handling, an upgraded audio system, and better heating and air conditioning. Those are real benefits that apply to everyone buying that vehicle.

But you might derive yet another benefit, a psychological one, that comes from driving a BMW, Mercedes, Lexus or other high-end vehicle. It could make you feel a sense of accomplishment because you have reached a level of wealth to afford it. Or it might make you feel better about yourself, even superior to other drivers.

Buying a Jeep might make you feel adventurous. Buying a Volvo might make you feel safe. Buying a hybrid gas-electric car might make you feel like an environmentalist.

Other car buyers just won't get any psychological benefit from a car purchase. They just want a vehicle to get them to and from work.

So psychological income is highly individual. Reading product reviews and evaluations, such as those in Consumer Reports, can help you judge quality and monetary value. But they cannot measure for you the satisfaction you will derive from the purchase.

For example, a man might care a great deal about his brand of golf clubs and gets satisfaction from them during every round of golf. But he couldn't care less about the tools and appliances in his kitchen. Meanwhile, a woman who loves cooking gourmet meals gets great satisfaction from having a top-quality set of kitchen knives and a nice-looking stainless steel high-end stove. But she couldn't even name the brand of golf clubs she uses on weekends. Those two people should spend very different amounts on their golf clubs and kitchen appliances.

The point is to spend money on stuff you care about. If you don't care so much, just buy functional brands. It can save real money and lead to more satisfaction. It might even make shopping easier, considering the mind-numbing plethora of choices available for most purchases. In other words, it helps you purchase on purpose.

"The idea is to empower people to enjoy their lives to the fullest, while staying debt-free and while managing their money in a responsible way," said Jeannie Lewis, spokeswoman for debt-counselor Precept Financial Solutions of Dallas. "It's the act of making conscious decisions about whether you're going to spend the extra money on a premium brand or not, because it adds up."

Money unspent on a brand name could go to savings for future purchases or other immediate purchases that matter more to you, she said. "It's conscious goal-setting. You get an idea very quickly of where you can save money."

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Budgeting for psychological income

How do you decide whether to pony up more money for an elite brand? Measure the psychological income for purchases in your life. Here's how, adapted from the Personal Psychological Income Assessment developed by Jeannie Lewis of Precept Financial Solutions and available at www.preceptfinancial.com/press(underscore)releases.htm:

Make a list: Write down the major categories of spending in your life.

Evaluate PI: In a column next to those spending categories, write 1 for the lowest level of psychological income you derive from the purchase. Place a 2 beside those that provide a moderate level of emotional satisfaction, and write a 3 next to those that dramatically affect your feelings. Do this privately and be brutally honest with yourself. Using the list, spend extra money on the high-rated items and buy just the functional brand for the low-rated items.

Drill down. Break down the major categories of spending into subcategories to reveal more opportunities for savings. For example, a man might rate his work wardrobe as a three for psychological income. But more specifically, he evaluates his suit and ties as threes, his shirts as two and socks as one. The next time he goes shopping for work clothes he knows how to divvy up his money to get the greatest satisfaction from the purchases.

True, the exercise itself is simple. But the objective is to think critically about the types of purchases you care most about--those that give you something extra. If you don't get that additional boost, go for a cheaper brand and use the saved money elsewhere.

"This is a fun type of budgeting exercise, because you're picking out things you like," said Lewis, adding that Precept Financial uses the PI assessment with its financially strapped clients. "You might be surprised at the things that aren't so important to you and you didn't even think of saving on."

After a while your PI priorities will become part of your everyday purchase-decision process.

-- Gregory Karp

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Gregory Karp is a personal finance writer for The Morning Call, a Tribune Co. newspaper in Allentown, Pa. E-mail him at yourmoney@tribune.com.

For additional discussion on spending wisely, see the Spending Smart blog at http://blogs.mcall.com/spendingsmart.