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Understanding Money


Money Desensitization

Our world is filled with people and companies who spend a great deal of time and effort in the pursuit of your money. This is especially true on the Internet, where merchants ruthlessly exploit the fact that there are no concrete cues to remind you that you are spending real money. Many Web sites, for example, are set up to encourage you to use your credit card to buy impulsively. Companies purposely design such sites to entice you, by any means they can, to spend, spend, spend.

Such experiences, of course are not unique to the Internet. They abound in our culture. Modern marketing techniques are designed to take advantage of the fact that, the more abstract the transaction, the less you will realize the true impact it is going to have on your life.

For example, have ever you been to a casino? If so, you will have seen how carefully the environment is designed to encourage you to suspend your critical judgment. There are no windows, no clocks, and no reminders of the world outside (the one in which you must work and pay your bills). Instead of allowing you to bet with real money, casinos encourage you to use clay chips that feel like play money, or small plastic smart cards that keep track of your net worth invisibly. Moreover, to ensure that you don't think too much about what you are doing, the casino provides a host of distractions such as noise, colored lights, costumed hostesses, and free alcohol (not to mention ATMs, check cashing, and access to liberal credit card advances).

Casinos are purposely designed to desensitize you to the fact that the liabilities and debts you incur must ultimately be satisfied in real money — money that may represent many hours of hard work and effort on your part.

To be realistic, when you walk into a casino you are fair game. After all, it is a gambling hall, devoted to taking as much money as possible from people who think they can get something for nothing. No one entering a casino should have any illusions about the purpose of the facility.

However, monetary desensitization is ubiquitous in our culture. Because our monetary system is so abstract and so complex, many people have real trouble understanding the nuances. In particular, unless you are paying strict attention, it can be difficult to appreciate the true extent of your personal liabilities and debts.

For example, a gas station will advertise their gas at, say, 299.9 cents/gallon, rather than 300 cents/gallon. A television commercial will advertise an exercise machine for "four easy payments of $29.95 and a small shipping and handling charge of $9.95", rather than $129.75. When the numbers get bigger, the desensitization efforts get more extreme. Consider this example.

In the United States, many college students must take out student loans in order to pay their expenses. Indeed, it is not at all unusual for a student to borrow $10,000/year. This means that, by the time he graduates, the student will owe $40,000. By the time he has paid it all back, including interest, that $40,000 will have grown to almost $56,000 (assuming a 10-year loan at 7% interest, which would require 120 monthly payments of $464).

Although this is a huge sum of money for a kid just out of high school, the financial aid system is designed to desensitize students to the magnitude of the liability they are about to incur. Once the loan is arranged, all a student has to do is sign some papers. In many cases, the student doesn't even see a check. The money is sent to the school, which applies it directly to his account. The whole process is so transparent that the student has no real feeling for what he is doing — until he graduates and has to start making payments.

Consider an alternate scenario. A college student is arranging for his first student loan. Instead of making the whole thing into a painless procedure, the loan officer takes the student into a room in which there are boxes filled with $20 bills.

"Do you see those boxes and all that money?" says the loan officer. "I want you to count the money, out loud, one bill at a time, until you get to $40,000. That's 2,000 bills."

Let's say the student counts one bill a second, so it takes him 33 minutes and 20 seconds to finish. When the student is finished counting, the loan officer tells him, "Take a careful look at the pile of 2,000 $20 bills you have just counted. That is what you are thinking of borrowing over the next four years."

"Now," continues the loan officer, "I want you to count out 665 more $20 bills." The student does so, which takes him another 11 minutes and 4 seconds.

"That," the loan officer tells the student, "is all the extra money you are agreeing to pay in interest: $13,300. Remember, you are going to have to pay all this money, whether or not you even finish school or get a good job. Once you borrow it, you have a legal obligation. Now, I am going to leave you alone for a few minutes, and I want you to think about how many hours you are going to have to work to earn enough money to pay back your loans."

This is a story, of course, that will never happen. However, I want you to remember it each time you buy something on the Internet. Before you type your credit card number, imagine yourself counting out the money in real bills — and don't forget to include the interest and the shipping and handling.

I have a friend whose landlord insists that she pay him in cash. Believe me, she has a real feeling for how much she pays because, each month, she must get the cash, count it, put it in an envelope, and give it to the landlord in person.

In our society, though, paying cash for anything but small purchases is unusual. Most of the time, we use credit cards, debit cards, checks, or automatic billpay services. Sometimes we don't even see the transaction. Like the student in our story, we can incur a liability and all that happens is a sum of money is transferred electronically from one computer to another.

If you want something to think about, imagine you are buying a $200,000 house. You pay 20% for a down payment and borrow the rest by taking out a 30-year mortgage at 7.5% interest. Let's say the bank were to force you to count all the money, in $20 bills, before you signed the documents.

It you count one bill/second with no breaks, it would take you 2 hours, 13 minutes and 20 seconds to count all the money you are borrowing ($160,000). It would then take you an extra 3 hours, 22 minutes and 17 seconds to count all the interest you will end up paying before the mortgage is finally paid off ($242,748).

In other words, if you count one $20 bill/second, it would take you a total of 5 hours, 35 minutes and 42 seconds to count all the money you will have to pay to fulfill the terms of your mortgage contract.

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