The Case for Cutting Your Losses
Recently my significant other revealed the following four pieces of related information:
- She has a monthly membership with a massage therapist
- As part of this membership she accrues massages, which rollover when not used
- She has an enormous number of massages accrued…
- Because she pretty much never goes to the massage therapist
When I suggested that she cancel the membership, citing the fact that she’s spending money on a service she doesn’t use, she replied that she can’t cancel the membership until she’s used up her accrued massages.
“If I cancel, I lose all of those massages,” she explained. “I’ll waste all that money.”
So currently her plan is not to cancel the membership, but to somehow use up this ludicrous backlog of massages and then cancel.
“But you keep accruing new massages every month,” I noted. “You see how this plan is a bit flawed.”
“I'm aware,” she replied. “You should write about this.”
“Tell other people to not do what you’re doing?”
Spending money is a bad way to save money
I think we probably all know someone with the old car that keeps breaking down. They spend a lot of money fixing the transmission and then the brakes go. “Well, I spent all that money on the transmission. I have to keep the car and pay for the brakes or I waste all that money I spent on the transmission.”
It’s a cycle we all fall into occasionally. It’s similar to the mentality that keeps gamblers at the table when the cards are routinely not in their favor. I have to make up what I’ve lost. When money is tight (and even when it isn’t) it’s hard to walk away from a sunk cost. For most of us, every penny counts. That’s why it’s so hard to let go.
But the truth is that smart money management is much less about always making the right choices, and much more about understanding when to say “No more” and taking things in another direction.
Learning to say goodbye
You will continually lose money throughout the course of your life. It’s inevitable. What compounds this problem is our inability to let go. Until the moment when we finally accept our loss, there’s still that glimmer of hope. It won’t all have been in vain.
Again, it’s what keeps gamblers going. If you feed a quarter into a slot machine and nothing comes out, it’s lost. But it doesn’t feel like a loss unless we get up and walk away from the machine. If instead we stay there and put in another quarter, we haven’t lost yet – in fact, we may still win.
In gambling, this is the road to going bust. In life, it simply leads to more and more wasted money. The solution is simple in design, but difficult in execution – learn how to walk away.
Walking away is difficult because of the emotions involved, which is why you should attempt to remove some of that emotion. Take the example of stock market gurus, most of which make decisions driven entirely by data. They create algorithms and let math tell them when to buy and when to sell.
Forget the feeling of loss. Let math tell you what to do. In the case of the massage membership, I’d tell my significant other (were she so inclined to listen) to sit down and plot out this massive pile of massages she’s amassed. How often can she realistically go for a massage? How long will it take to use up her rollover massages? How much will she have spent in additional membership fees in the meantime?
Math tends to paint a stark picture. The numbers can help you separate from the anxiety that comes from loss. It doesn’t make walking away any less painful, but at the very least it helps you to understand how much more painful not walking away will be.
Wasting money stinks, but you know what stinks even worse? Wasting more money.