The A La Carte Method: Use Psychology Against Yourself to Save Money
June 05th, 2008 - 76 Comments
I was thinking about my friend who spent 30% of her income on subscriptions, and I wanted to share a method to dramatically cut down on unneeded subscriptions that you currently pay for.
These subscriptions might include:
- Amazon Prime
Subscriptions are a business’s best friend: They let companies make a reliable, predictable income off of you — with no action on your part. Without doing anything, you invisibly pay money each month.
There’s a convenience to this, of course — I set up as many automatic subscriptions as possible — but there’s a significant cost: When was the last time you scrutinized your monthly subscription and canceled one?
Probably never. Yet compare this to any recent time you went shopping. When was the last time you saw something you liked, but decided not to buy it?
In the above paragraph — read it again! — is the key to cutting your spending on subscription items. I’ll show you how.
The A La Carte Method
The A La Carte Method takes advantage of psychology to cut our own spending. As Richard Thaler, a professor at the University of Chicago, illustrates in his excellent book, Nudge, we are much more likely to do things when no involvement is necessary.
Do you contribute to your 401(k)? In one study, 49% of employees contributed when they had to complete forms (i.e., actively take action) ….but that number skyrocketed to 86% when they were automatically enrolled in the 401(k) plan, not requiring them to take any action. (Of course, they could always opt out.)
Here’s how you can use the A La Carte Method for yourself. Cancel all the discretionary subscriptions you can: your magazines, annual Rhapsody plan, cable — even your gym. (It would be totally ridiculous to cancel your Internet, though. I’d cry like a little girl if I couldn’t get online from my house.)
Next, buy what you need a la carte:
- Instead of paying for a ton of channels you never watch on cable, buy only the episodes you watch for $1.99 each off iTunes
- Buy a day pass for the gym each time you go (around $5-$10)
- Buy songs as you want them for $0.99 each from Amazon or iTunes
Why does this work?
The A La Carte Method works for three reasons.
1. You’re probably overpaying already. Most of us dramatically overestimate how much value we get from subscriptions. For example, if I asked you how many times a week you go to the gym, chances are you’d say, “Oh…2 or 3 times a week.” That’s BS. In fact, in one remarkable study of three health clubs, two researchers from Stanford and Berkeley showed that gym members overestimate how much they’ll use their gym membership by over 70%. In fact, members who chose a monthly fee of ~$70 attended an average of 4.3 times per month. That comes out to over $17/visit — when in reality they could have bought a pay-as-you-go pass for $10. Because these people are overly optimistic about how often they’ll use the gym, they lose over $700 over the lifetime of their membership. BAD MOVE.
2. The Method forces you to be conscious about your spending. The second reason that the A La Carte Method works is that it forces you to be conscious about your spending (like my friend who spends $21,000/year going out). It’s one thing to passively look at your credit-card bill and say, “Ah, yes, I remember that cable bill. Looks like a valid charge. Tallyho!” It’s quite another to spend $1.99 each time you want to buy a TV show — and when you actively think about each charge, you will cut consumption. As one of my mentors, Stanford professor BJ Fogg, wrote in his book Persuasive Technology, tracking is one of the most effective persuasive methods.
3. You value what you pay for. The third reason it works: You will value whatever you’re buying if you’re actively spending out of your pocket, rather than an invisible subscription.
The downside of the A La Carte Method
The big downside is that this method requires you to un-automate your life, which is the price you pay for saving money. I encourage you to use this if you find yourself short of cash and wondering why you can’t save more money each month.
Or give it a shot for 2 months and see how it feels. If you don’t like it, go back to your old subscription method. It can’t hurt.
How to implement the A La Carte Method
1. Target 1-3 discretionary subscriptions you have. I recommend any music subscriptions, Netflix, and the gym. (But don’t let the gym membership be your excuse to become a fat ass.)
2. Calculate how much you spent over the last month on these subscriptions.2
3. Cancel the subscriptions and begin the A La Carte Method.
4. In exactly 1 month, check and calculate how much you spent over the last month. That’s the descriptive method.
5. Now, get prescriptive. If you spent $100, try to cut it down to $90. Then $75. Not too low — you want your spending to be sustainable — but in this step, you can control exactly how many movies you rent or how many magazines you buy, since each one comes out of your pocket.
Remember, this isn’t about depriving yourself. The minute your personal-finance infrastructure becomes oppressive is the minute you stop using it. The ideal situation is that you realize you were spending $50/month in subscriptions on stuff you didn’t really want — and you’ll consciously reallocate that money into something you love, whether it’s the gym, travel, or investing.
[Update]: Here’s a detailed writeup on implementing the A La Carte Method.
The point of this article is to challenge the assumption that “subscriptions always save you money.” If you liked this, you may want to check out my takes on why we’re all hypocrites about our $28,000 weddings and why I bought a new (not used) car.
My friend, a perpetual Manhattan bachelor, just got into a relationship with a sweet girl. So naturally, we invited them ...Read More
One of my students asked this amazing question, and I loved it so much that I want to share it ...Read More