How the Bottom-Dollar Effect Can Help Curb Your Spending

by Emily Guy Birken · 16 comments

When I was a pre-teen in the early 90s, I used to roam the mall with a pack of girlfriends once a week.

I quickly discovered that the fun I had spending money on new scrunchies, slap bracelets, and Lisa Frank notebooks seemed to diminish as my money supply got lower. Whatever pair of earrings or soft pretzel I bought with the last of my money never seemed worth the price.

According to a this study, there was a reason for my dissatisfaction: a phenomenon called the bottom-dollar effect.

Basically, when we spend the last of our resources on a product, we end up feeling much less satisfied with it. Here’s a breakdown of the bottom-dollar effect and how you can harness it to make better spending decisions:

What Causes the Bottom-Dollar Effect?

Opportunity Costs

Behind my dissatisfaction with the purchase I made with the last two dollars in my wallet is something called opportunity cost. Opportunity cost refers to the fact that if you spend money (or time, or other resources) on any one thing, then you can no longer use it on anything else.

When you’re at the mall with a crisp $20 bill in your fanny pack, you tend to ignore opportunity costs because you feel as though you have enough money at your disposal. Though buying the glitter slap bracelet meant I couldn’t spend that $3 elsewhere, it didn’t matter because I still had plenty of money available.

Once you get down to the last of your resources, however, then you’re much more likely to think about everything else you could do with your money other than make that purchase. That sense of lost opportunity will color your view of the product, making you less satisfied because it represents a loss of other options.

If I was given the opportunity to get the same slap bracket later in the day when I only had $5 left, I may have skipped the purchase because I would rather spend the last of my money on the gelato place that we know we would pass by.

This happens with larger amounts too. I’ve always wondered why one of my best friends always spends more money during the beginning of the month and seldom goes out at the end of the month. After learning that she is paid monthly, I thought it was only because she used up all her money and didn’t have any left at the end of the paycheck period. Now I know that there may be something else at work here.

The Pain of Paying

Of course, most people are at least a little reluctant to part with their money. According to the study’s author, “researchers have found that people suffer psychological discomfort when they spend resources. Fortunately, we also derive pleasure from consuming! So long as the pleasure experienced outweighs the pain, we are satisfied.”

So you know that friend who you think just loves to spend money? That’s not exactly true. He feels pain too. It’s just that he always gets more satisfaction from consuming than the pain he feels when he spends. There may be a way to help him though.

That pain of payment becomes exacerbated when payment means you’ll be using up all of your resources. That’s because we tend to think of money in relative terms. Losing $5 is no big deal if you’re carrying $100 in cash. You might not even care if it’s automatically deducted from your credit card. However, it feels like a calamity if you only have $10.

So paying for something with your “bottom dollar” becomes much more painful.

What This Means For You

Though the authors of this study offer some suggestions for helping marketers overcome the bottom-dollar effect with customers, I think it’s an advantage for us as consumers.

If you know you’ll be less satisfied with a product you buy with the last of your money, then you’re much more likely to just keep your cash in your wallet. This is one of the many reasons why it’s such a good idea to only go shopping with cash. Credit cards simply don’t give you the same pain of payment that forces you to stop and think before each purchase. Yes, the rewards you get with a credit card are real money. Getting 2% to 5% back on everything adds up and it’s all after-tax savings too. But there’s a reason why studies after studies have shown that people spend as much as 30% more when they use a card versus cash. Even if you pay off your credit card bill each month and have never paid interest on your credit cards, it’s still possible that you would be better off without plastic.

Contributing to your 401k can have a similar effect. By pushing more funds into your retirement account and thereby reducing the amount you see on your paycheck, you are artificially creating the illusion that you have less money to spend. Ditto with having automatic savings if it’s set up to withdraw from your account as soon as your paycheck hits. When you always see a lower amount of money in your accounts and you know you can’t easily access your retirement until decades later, then every dollar will seem more important.

Have you experienced the bottom-dollar effect before?

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{ read the comments below or add one }

  • Impersonal Finances says:

    Automatic investing (via your 401k, etc.) is really all it takes to start living below your means. As you said, the less you think you’ll have, the less room there is for slap bracelets!

  • Dividend Power says:

    Seems a lot like buyer’s remorse.

  • Jay Rigler says:

    I couldn’t agree more. I used rewards credit cards for decades, paying them off every month, and getting cash back. Of course, I thought I was so smart and beating the system.

    But, then I decided to try using a debit card for 3 months, just to confirm that I wasn’t overspending. And, almost like magic, my spending decreased. The last available dollars are super precious!

  • Samantha says:

    I do a lot of buying in the past. I had enough I realize that some of my purchase is not necessary, so I stop and only get what I need and it saves me money.

  • David @ says:

    I actually have this problem even when I’m not using my last dollar. The reality is that I have solid finances but I feel guilt of spending due to the theoretical opportunity cost of not having that dollar compound for me.

    It’s getting to a point where the negative feelings start affecting my enjoyment whenever I buy something I want, so I need to consciously work on this.

  • Ricky Willis says:

    I love this post and can completely relate to it. Many a time have a bought an item with the last of my money and felt it wasn’t worth it. It is funny how the amount of cash you have can affect the way you feel about purchases.

  • Nik @ Midlife Finance says:

    This is so true. I had experienced it so many times, and I always keep making the same mistake. I also agree with the authors of the study. This is especially true when resources are limited.

    • David @ says:

      Maybe you can remind yourself right before you go to the mall so you can spend less next time. Alternatively, you can keep all the credit cards at home and bring cash to simulate scarcity. It’s worth a shot!

  • Alexis says:

    I think it’s a much better idea to buy items with cash for numerous reasons. You get to actually see the cash be taken away which has been proven to have people spend less money than using credit cards. When you see a credit card being swiped, you don’t physically see all the money being taken. Especially when you are very low on money, I find items way less appealing.

    • David @ says:

      That’s true Alexis. Do you think it’ll make a difference if you actually mail a check to pay off your credit card? Or do you think cash is still better because you see money being “taken away” with every transaction?

  • Noah says:

    Very intriguing. I definitely can relate to the bottom dollar effect. Aside from using cash, you can always give yourself a “time-out.” Instead of buying the product impulsively, I tend to give myself at least a few hours (or even a month) to see if my fascination with the product wanes or not. It usually fades away and I end up saving my money. You can always assign a budget number that you need to keep every month to discourage any unnecessary spending. Having a specific goal in mind always keeps us into our toes.

  • Bry says:

    This is very true. Especially the fact that we think in relative terms. Psychologist call this our reference point. It is only natural that when we are low in resources, every decision becomes more scrutinized. A tip I like to use is to think in terms of scarcity even if you have a million dollars. Scarcity always opens yours eyes to what is essential and practical.

    • David @ says:

      I see a positive side to this. With our ability to scale down our spending and adapt when resources are low, it will make our retirement stash last much longer than those studies that have retirees spending more year in and year out.

  • Gretchen says:

    Interesting….I definitely see your point about the psychological effects of spending money. I look at purchases by how many hours I have to work to pay for an item – and I use my after tax amount. It definitely puts things in perspective!

    • David @ says:

      That’s an awesome way to think about spending Gretchen. I like to think how much money I’ll end up having if I didn’t buy that item and instead invested the money for 10 years instead. Either way, it helps limit the spending!

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