Spend wisely by following a few simple rules

|  Duke University economist Dan Ariely has long studied people’s odd behavior around money, a topic he explores in his recent book, _Dollars and Sense_ (coauthored with Jeff Kreisler).

Ariely talked to AARP The Magazine about how to make financial decisions that bring you more contentment. YOU SAY THAT FINANCIAL DECISION-MAKING IS OFTEN IRRATIONAL. WHAT’S AN EXAMPLE? We

spend very differently depending on the medium of payment. For instance, when people pay their bills with a check — let’s say, the electricity bill — and then they move it to automatic

deduction, they end up spending, on average, 4 percent more. Why? Because when we write a check, we pay attention: We think about what we can save, we terrorize our family a little bit, and

we turn off some lights. But when the money goes automatically from our checking account, we don’t think about it as much, and we end up spending more. So payment is not just about the money

that leaves; it’s also about how much attention we pay to it. As we age, if we do more and more things with automatic deductions, it means we’ll pay less and less attention to what we’re

spending money on. DOES OUR IRRATIONALITY ABOUT MONEY CHANGE AS WE GET OLDER? I think the big difference comes when we retire. We move from being breadwinners to spenders, and we start

thinking of ourselves not as people who are helping our family, but people who are depleting savings. That’s a big shift. When people start eating into their principal, it weighs on them a

lot. In a study we did quite a few years ago, we found that retirees worried many times a week about whether they would outlast their money. Even people who could do it were very worried.

SO, LET’S SAY I HAVE ENOUGH TO LIVE ON, YET I’M STILL WORRIED. WHAT CAN I DO TO FEEL BETTER? Create a discretionary budget. You need to say, “Let’s figure out how much we can spend a month

on restaurants, movies and so on.” Life is about enjoying things, and if you have a budget for coffee and restaurants and beer that is $600 a month, don’t try to spend $400. Try to spend

$600. And I think the right approach is not to create a budget for coffee and a budget for movies and so forth, but to create one big budget for all the discretionary spending. Ideally, put

that amount in cash in a separate envelope, or on a prepaid card or something like that, and make it a goal to spend that amount. ARE PEOPLE TRYING TO EXPLOIT OUR IRRATIONALITY?