$35 is $35!

We came across some intriguing research recently. People were presented with a hypothetical situation in which they could buy an item for $100 at a local store, or the same item for $65 at a store some distance away. Basically, the people could choose the inconvenience of travelling to save $35. Most people chose to travel to save the money.

The same people were then presented with another scenario. They could buy an item at a local store for $1000, or the same item for $965 at a store some distance away. Once again, people could choose the inconvenience of travelling to save $35. In this case, however, relatively few people chose to go out of their way to save the money.

At first glance, this is not rational: $35 is $35. But people would only travel to save $35 if the $35 represented 35% of the purchase price. When the percentage fell to just 3.5%, people were not interested.

What this research shows is that people are often more cautious about saving money on small purchases than they are about saving money on large purchases. This is, of course, almost exactly the opposite of truly effective money management.

When you come across research like this, the first thing to do is to ask yourself whether the research rings true for you. Are you the sort of person who would go out of their way to save money on a small purchase but would take less care on a large one? If you are, then you have two ways to respond.

The first way is simply to be aware that $35 is $35. Ignore percentages and decide whether a trip across town (or whatever the equivalent inconvenience is) is worth it. Think in dollar terms, not percentage terms. This might be useful, for example, when negotiating an interest rate on a home loan or something of similar size. Let’s say you are borrowing $400,000 to buy a home. If you can save just 0.1% on your interest rate, that will equate to $400 per year over the life of the loan. While negotiating with your bank, you might simply look at the 0.1% and think that it is too small to worry about. 0.1% sounds like nothing. But 0.1% of a large number is a large number. A small piece of a large cake is a large piece of cake.

A second way to respond is to become less concerned about achieving a discount on a small priced item. One way to do this is to place a dollar value on your time. Let’s say that spending two hours walking around the shopping centre might save you $20. That prices your time at $10 an hour. Would you pay $20 to get out of the shopping centre two hours more quickly? We know we would!