Different as we are, we have distinct ideas on what we ought to spend most of our money on, too. The other day we were talking on the phone and she mentioned the gym she and her fiancé go to: how it had a pool and good exercise classes, so I asked how much it cost.
"Well, it might seem like a lot," she said, "but it's worth it."
"Oh, how much is it?"
"So...it's seventy dollars a month."
I had to choke back a gasp at this point, but I reminded myself that I'm a frugal weirdo. Most people probably wouldn't blush at spending that kind of money on something as beneficial as a gym membership. And, to be fair, it is for three people: my sister, her daughter, and her fiancé. So at $23 per person per month, it's comparable to what you'd see at some other gyms. Still, it's $840 per year, so it's not exactly chump change.
But I was most intrigued by what she said next: "But we go all the time: at least four times a week. Seventy dollars is a lot to us, so we want to get our money's worth."
Sunk cost! My wife and I are huge nerds and love the concept of the sunk cost fallacy, so we yell out, "Sunk cost!" whenever we see an example. (It gets us some weird looks from time to time.) The sunk cost fallacy occurs whenever we let past financial decisions or costs illogically impact our present ones. The sunk cost fallacy is what keeps you sitting in a terrible play with your wife, even when you'd both rather leave, because you dropped $150 on the tickets already and want to have a fancy date night. Our subconscious doesn't like the idea of wasting money. So we suffer through the performance, "to get our money's worth." Logically speaking though, we ought to just walk out of the play. We're not getting our $150 back either way, but we can get those two hours of our lives back if we just head to the bar across the street.
When the costs of our past financial decisions can't be recovered, they're considered "sunk": like when Rose drops that fancy necklace into the water in Titanic. (Why'd she do that, anyway? That necklace could have been sold at auction and fed the world's poor for a year. And why couldn't she just scoot over and let Leo share the floating door with her? Quit being selfish, Rose.)
And in the case of my sister's gym membership, since she signed up for a year contract, those funds are as sunk as that fancy necklace at the bottom of the Atlantic, thanks to that wasteful old broad. (Man, I have some issues to work out with that lady.)
We typically think of the sunk cost fallacy as something bad: something that creates sub-optimal, illogical behavior. But in the case of my sister's gym membership, it's increasing a healthy behavior. She's going to the gym more often, because she doesn't want that $70 to go to waste. I asked if she thought she'd go less often if the membership were only $20 a month, or if it were free.
"No, I think I'd go the same amount." Her fiancé agreed.
But that's the tricky part with the sunk cost fallacy: we typically don't realize its impact on our behavior. We want to believe we're purely rational beings, weighing our options like cool, calculating automatons. But as David McRainey notes so eloquently, the truth is that your "decisions are tainted by the emotional investments you accumulate, and the more you invest in something the harder it becomes to abandon it." The sunk cost fallacy helps my sister work out more because it costs so much. She's "invested" more money into the gym, so it's harder to abandon the healthy behavior. My eight dollar a month gym membership is definitely less expensive, but then there's the pesky fact that I rarely go. Because eight dollars is no big deal, I don't get the same benefit of sunk costs.
Which all goes to say, there is sometimes a hidden cost to frugality. Buying the best value option will save us a few dollars, but may cost us in other ways. When it comes to healthy behaviors, like eating more vegetables or exercising, we might do better for ourselves if we fought our frugal tendencies, and bought the more expensive option.
*Photo is from Rennett Stowe at Flickr Creative Commons.