The psychology of money

How much money do you really need? Nearly everyone, regardless of their wealth, responds with an amount higher than what they currently have. Many financial planners suggest that Americans need to save at least $2 million by retirement in order to maintain their lifestyles. Yet what if you die before you spend all that money? What would the point of all that scrimping and saving have been?

A new article in the New York Times suggests that most people can maintain their existing lifestyle while saving just a fraction of that amount -- $400,000 will do for a couple currently making $125,000 per year, and most of that can be saved during the 10 years before retirement. If you save too much when young, "You could end up squandering your youth rather than your money."

One problem is, the more we think about money, the stingier we get. Shelley Batts reviews some of the recent research:

In one experiment, it was suggested that just thinking about money made people greedy. Subjects were given $2 worth of quarters and then were asked to solve a word puzzle. Some of the puzzles were word-neutral, and others had words denoting money and wealth like "high-paying salary." After finishing the puzzle, they were told they could donate some of their quarters to a student emergency fund. The subjects that completed the neutral puzzle donated an average of $1.34 while those who completed the money-centric puzzle averages a donation of 77 cents.

This might also partially explain the well-known phenomenon that people with lower incomes tend to donate a higher proportion of their salary to charity. In a second experiment, people with more Monopoly money were less likely to help a person who dropped a box of pencils. The more we have, it seems, the more we want to hoard -- even when we could be spending the money on ourselves.