Misattribution

For a long time I wondered how intelligent, gainfully employed people could have persistent money problems. Well, the answer is simple, and it's all around us: intelligent does not mean rational.

Yeah, so we all know that. But the core of economic theory is that people will usually act in their own self-interest. If we have cash, supposedly we'll use it for whatever provides the most utility.

But it doesn't always work that way. Rather than a means of exchange, money becomes symbolic for security and fulfillment. Instinctively we feel that by having more stuff, we'll be better off.

Taking human history into perspective, that makes perfect sense. For eons, very little could be classified as "wealth." People had homes, and some had items like jewelry, but otherwise most things (food, tools, etc.) didn't last long. If folks wanted to enjoy their wealth, they had to eat it or wear it or use it fast.

Today that behavior makes little sense, thanks to durable wealth and liquid currency, but it happens anyway. A lot. Economists call it the "wealth effect": when people feel richer, they spend more.

Examples abound. The dot-com bubble brought huge paper gains in equities. The subsequent housing bubble brought not only large profits, but increased access to cash by borrowing against inflated home values. People spent like crazy.

It happens on an individual scale as well. Although increasingly many people don't expect Social Security to support them in retirement, nearly half cash out their 401k plans when changing jobs. And despite reams of financial advice, millions of taxpayers increase federal tax withholdings as a means of forced saving, since having more money in their pockets would cause them to spend it. So what do they do when they get a big tax refund at the end of the year? Spend it.

Ordinarily I wouldn't care about this sort of thing, but a) I see it happening to personal associates, and b) as an unmarried middle-class male with no kids, I have to pay for the consequences.

One friend, whom I'll call Scott to obscure his real name, recently became a father. Thanks to the bouncing baby tax deduction, not-Scott gets a nice fat Earned Income Credit. And a nice fat Pell Grant. And shortly prior he started a reasonably fat job. This is a great opportunity to straighten out their finances, salt away some cash for future expenses and Junior's college fund and so forth. Except...hello, wealth effect. First Daddy needs some musical gear...and computer equipment...and a brand-new car....

Another, whom I'll call Scott for that is his real name, changed jobs and residences some months ago. With all sorts of nasty debts and alimony outstanding, he settled on cashing out his 401k for solvency's sake. Okay, tough deal, but it makes sense. Fresh start, yadda yadda. But wait a minute: rather than putting the few remaining thousands into an IRA, he bought a U-Haul truck.

Not that he or anyone else has a use for it. Right now it's just rusting next to his house. By Scott's own admission, he just always wanted to buy one as proof that he was doing well. This of course required liquidating his retirement, which I tend to think demonstrates the opposite. Although a year ago all I had was my humble Escort and about $500, I now have more assets than he. Wouldn't matter, except he's in a committed relationship with one of my close family members--who has her own similar problems to contend with.

So many people need only rethink what money means to them, and realize that it cannot provide fulfillment, only the outer stability necessary to find meaning within oneself. I hate to be the atheist who points this out.