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Money

Beware of the sunk cost fallacy

Photo by Elijah O'Donnell on Unsplash

Question: Have you ever sat through a bad meal because you’d already paid for it and leaving would seem wasteful to you?

Once, I had held onto a skirt that made me look bloated because I wanted to get my money’s worth. 

You may have heard the phrase, ‘cut your losses, ‘ it means to withdraw from a situation that is no longer serving you. Are you holding on to your job because you’re scared of the time and effort you’ve invested in it? Have you ever kept walking despite having the option to order an Uber because you’d covered a long distance and the oncoming vehicle might be your ride? 

Cut your losses if you’d paid a crazy sum for an item. Instead of crying over money spent, it’s more helpful to learn from your experience and make a note to watch out for next time.

If you’ve encountered something like this, then you have experienced a psychological phenomenon known as a ‘sunk cost bias.’

A sunk cost is a cost that has already been incurred and cannot be recovered.

Wikipedia

Sunk cost fallacy explains the inclination to continue to invest time, effort, and money into an endeavour because of the costs we’d already incurred. 

My Experience at Dodo Pizza 😱

Last weekend, I hung out with my friend, B, at Dodo Pizza. The Pizza restaurant is known for providing Pizza by the slice and whole Pizza, in Ikeja City Mall, Lagos, which is one of the things I loved about them — the freedom to buy a pizza slice instead of having to purchase a full box. Their vast food menu is something to drool over. This restaurant provides not just Pizza, but other meal options like Sausage rolls, Chicken wings, Cinnamon rolls, different flavours of Ice Cream, and the bone of contention – Dodster. I had always wanted to have a taste of their Dodster — A dish that boasted of fine dining and chunky delights. It looked like a Sharwama, but one that went to Grad school. However, on this day, they messed up my order, switching my Classic Dodster with B’s Beef Suya Dodster. 

I did not have an idea of what the Classic Dodster tasted like, but as I bit into the hot baked wrap, I knew that this was a case of a sweet dream gone stale. Walking over to the counter, I asked if what I had gotten was the Classic Dodster, and they admitted they had mistakenly switched it up. I asked that they fix it, but they did not. The pizzaiolo who had prepared the Dodster came back to me with a message from the manager – he couldn’t care less. Their poor customer service oozed as they bade me farewell while I left their restaurant abandoning the hot baked wrap I’d purchased.

One thing about my Dodo experience is that I was able to call it quits when I could, although I felt sad that I didn’t get to eat the Classic Dodster, and peeved that the Dodo team didn’t consider me customer enough to treat me well. 

It’s okay to call it quits when you can

Here’s the deal. It’s okay to acknowledge that we’ve made a mistake and move on. Calling it quits is better than holding on to that career that you loathe. It’s better to leave a toxic relationship regardless of how much time you’ve invested. If you feel like ordering an Uber, do it right away as the bus you keep waiting for isn’t coming. It’s okay to lose $1000 instead of putting more money into that investment with the hopes that this time would yield a better result.

It’s okay to know when to abort mission, sailor.

Concluding my Dodo Pizza Story

The chef had asked how I was sure I’d have liked the Classic Dodster if they’d prepared it. In answering his question, I wouldn’t know if I’d have preferred the Suya Dodster, but it would have been nice if I’d gotten what I ordered. Taking a second look at the menu, I also might have hated the Dodster because I don’t eat ketchup. If I’d ordered a second time, it might have turned to a case of the Sharwama that went to Grad school but couldn’t finish because it flunked classes. Either way, I might not get to try out Dodo Pizza’s Dodster again. 

Lessons from Sunk Cost Bias

  1. Think of a sunk cost as money you’ve spent and cannot recover. This way, you do not depend on it to make decisions that will affect your future.
  2. Stop, once you realize that it’s time to move on to something else.
  3. Past mistakes are irrelevant. Accept what’s happened, understand that there’s nothing you can do about it, and move on.
  4. If you find yourself in a hole, stop digging. The point of no return only exists in our head.
  5. Invest in something new.
  6. Track your expenses and future opportunity costs.
Categories
Mindfulness Money Work

How to practice mindful spending with Google sheets

Photo by Tamarcus Brown on Unsplash

Until I started mindful spending, I didn’t understand what made me so apprehensive before salary day. Salary day was a day I always waited earnestly for because I’d spent everything from my previous salary, and a day I would later come to dread because I would spend all my monthly income trying to balance the past month’s debts. Later on, I’d try to improve on my spending, but it still didn’t matter because I wasn’t spending effectively.

Before I started mindful spending, I tried to remind myself of how much I needed to spend and how much I needed to save. The mind forgets, which is why we need reminders in our daily living. I drew up a plan that I visit every time to remind myself of the reason I started in the first place. A solid plan should be repeatable, organized, and agile.

What is Mindful Spending?

Mindful spending is being intentional about the way you spend your money and how your spending supports your goals. Satisfied Spending calls it lifestyle-based money management.

It is creating healthy spending habits that take you closer to your goals, instead of having your blood pressure rise when you think about what you’ve just purchased.

When you start spending mindfully, it becomes a part of who you are. You start asking yourself questions like these before moving money out of your account:

  1. Is this item in my shopping list?
  2. What is my reason for wanting to spend this money?
  3. What do I intend to achieve by saving this amount of money?
  4. Does making this purchase support my goals and needs? 
  5. How do I intend to achieve my spending goal?

I’ve come to understand that many people are not comfortable with engaging in money conversation. However, it’s okay to own up to the fact that our spending habit sucks. Every other thing follows from here.

I started mindful spending with Google Sheets. Google Sheets has a budget template that I customized to my preference. With the 50/30/20 rule, I created a planning sheet that helped me organize my spending into different categories. 

50/30/20 Rule of Spending/ Saving Mindfully - Winged Time Traveller
50/30/20 Rule of Spending/ Saving Mindfully

The 50/30/20 budget rule states that:

  • 50% of your net income should go to your Needs, e.g. Fixed expenses such as rent, work transportation, health, bills, and utilities.
  • 30% of your net income should go to your Wants, e.g. Lifestyle or flexible expenses such as food, travel, shopping, and even black tax, etc.
  • 20% of your income should go to your Financial Goals, which includes all kinds of savings and investments.

The 50/30/20 rule is ideal for me because it’s helped me with simplifying and organizing my finances. With the planning sheet, I was able to see how much I needed for what, and how much I should be saving.

I have prepared a monthly budget template for August that you may want to customize to your preference. Click on ‘file’ to make a copy.

Download your monthly budget template now

Confronting Black Tax with Mindful Spending

In simple words, black tax is the tax every first child pays for being born.

As the first child of my family and the first grandchild on one side, I understand the responsibilities expected of me. Thinking about these responsibilities can be very overwhelming as you receive a text sometime in the middle of the month asking for money. You have a job, so nobody wants to hear you don’t have money. And heavens save you if they have an inkling of your monthly income. It’s okay to say you don’t have, but what about next month, and the upper month?

What I did was allocate some money for black tax under my ‘wants purchases.’ And in case the need is more than I budgeted, I wouldn’t do otherwise because I don’t have anywhere to unearth the money from, do I?

How do you measure what works with the monthly budget template?

As you spend and save, make every change in the sheet. At the end of the month, check back to see how much you’ve spent in the month. It’s okay if you spent more than you budgeted. The key is to take small mindful steps which in turn makes a big difference.

Make a copy of the sheet for next month with adjustment to your spendings. For example, if you budgeted N40,000 for food and you spent more than the amount you budgeted, adjust the expense for next month to the amount you spent this month and follow from there.

If you spent below the amount you budgeted, make the same changes.

I hope you’ve enjoyed reading this as much as I enjoyed writing it. Please fill out this 1 minute survey if you downloaded the monthly budget sheet. I’d love to follow up with you to make sure you find the budget template helpful. Don’t forget to follow my blog so that you don’t miss any blog posts from me. Also, remember to share with that friend who needs this most. Thank you.