Carmen Wong Ulrich on why we spend

When it comes to managing our money we might think we're making rational decisions, but it's important to realize how our emotions play into our spending.

In her book, "The Real Cost of Living," Carmen Wong Ulrich divides our spending into basic categories: our homes, getting married (and carmen-wong-ulrichdivorced), raising a family, college, bad habits (like smoking, drinking and being overweight), being your own boss, managing credit cards, and saving and investing.

Q: What can help us make better financial decisions?

A: Knowing what drives a decision, truly, can help us improve our decision-making. If a financial decision is driven by an emotional attitude, let's say, keeping a car you can't afford because it makes you feel like you have freedom, even if you don't need the car to function day-to-day, you can better assess the 'cost' of this decision. Is it worth paying another $500 per month to feel 'free'? Do you have that extra $500? Does it matter? Could it work better for you someplace else?"

Q: What can we do to keep our emotions in check when spending money?

A: First, recognize that they are there. Emotions play a part in all our behaviors with money. Figure out what emotion is driving you. Is it fear? Need for security? Sense of entitlement ("I deserve it!")?

If the emotion is not serving your budget or household finances or future plans well, figure out what you can do to change that attitude. Motivation works well. Let's go back to that $500 per month car cost. Would visualizing saving $500 every month help? Maybe it means affording a big family vacation. Or a new bathroom or new furniture or reaching your retirement savings goal. Turn what might be "wrong" for your finances into what's right by transforming it into a useful, important goal.

Q: Do you think we psychologically categorize spending cash differently from buying something with a credit card?

A: Yes, and depending on the amount it can differ slightly or hugely. One reason it's easier to overspend these days is that we are removed from the actual transaction. There is no real exchange of goods -- i.e., you give me this and I give you that. Now it's "swipe." Imagine if we actually had to show up with cash for every transaction. How about that $250 grocery bill? What if you knew that taking 15 minutes beforehand looking for coupons meant you only had to turn over $220 at the register? Thirty dollars in your hand is much better than nothing left. Numbers on a balance sheet are hard to "feel." Cash money, however, feels good!

Q: In your book you mention the differences between how men and women experience money. Does this change how they spend and save it?

A: Women think too much day-to-day about money. We look at the next day, week or month, but are not as prone to plan long-term as men are. The data show that women are much less likely to carry enough life and disability insurance than men even though as they live longer and are more likely to have dependents (whether children or aging parents), they need insurance even more.

Men, on the other hand, 'play' a bit more with money, risking more when it comes to investing. But they may not understand how costs build. For example, your kid wants to start playing soccer on a team. Dad says "Yeah!" After all, the team fee is only $60. But the mom sees and says "Oh, no." Because that $60 is only the tip of the iceberg. There's another $120 for equipment, plus $50 cleats plus more gas and scheduling headaches for pick-up and drop-off.

Women can get much better at planning for long-term and 'what-ifs' such as saving for retirement as well as adding insurance coverage. Men can learn from women when it comes to the 'real cost' of day-to-day decisions and expenses.

See related: More women taking control of finances; Expert advice: Simplify your finances

Updated September 13, 2012

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