Did you ever take any Economics classes in college? Econ is one of those subjects that I've heard people either LOVED or HATED. No in-between feelings. In my case, I loved it so much that I majored in it :)
I remember one of our first lessons* in Econ 101 was the principle of "Sunk Costs".
(*Unrelated to this topic, but since I’m on the econ subject: I believe our actual first lesson on Day 1 was "There's no such thing as a free lunch" and taught us about opportunity cost- aka what you’re giving up when you choose something. For example, someone invites you to Chipotle and they offer to pay, you may call that a "free lunch" - but really, it's costing you the ability to eat something else for lunch (although who on earth would ever want anything besides Chipotle for lunch?), the ability to hang out with someone else, or to go run errands on your lunch break, take a nap, read a book, etc. Nothing is really “free”.)
What's a sunk cost?
Sunk costs are costs that you've already incurred and there is no way to get your money back. (I wrote about sunk costs twice before: in THIS throwback post about living your life and in THIS post about getting your money's worth with Stitchfix) Sunk costs are a big deal in life - especially in finances - because they can cloud our judgment and make us act irrationally.
Real life example of a sunk cost that inspired this post:
I ordered some hair stuff from an online-only retailer a few weeks ago. I tried it out and just wasn't a fan, so I sent an email asking if I could return the item for a refund. Well, sadly, they only do store credit refunds. (I probably should have looked into this before ordering the item… hindsight) ALSO, I would have to pay shipping to send it back, and then shipping to order whatever new product I buy with my store credit.
So I thought, "okay, bummer, I'm going to have to spend another $10 in shipping to get a new item... but I already spent $16 and don't have an item I like, so I might as well spend a little more to make that $16 worth it."
And then I realized my faulty logic. I was using the $16 sunk cost to base my future decisions on. Instead, I have to realize that I've ALREADY spent the money. There is, unfortunately, no way I can get that $16 back in my pocket in cash. The fact that I already spent $16 should not factor in to my decision to spend an additional $10 in shipping to get a new product.
What SHOULD I be basing my decision on?
I believe the correct question I should be asking myself is: is there anything in the store that I would be willing to pay $10 for? (assuming it's also $16, which many things are) I was considering getting a shampoo but I have to ask myself.... is the shampoo worth $10 to me? Or I could spend zero extra dollars and keep the product and suck up my losses. (or give it away to someone, or maybe try to sell it on eBay and recoup some of my money?)
How can I avoid sunk costs?
Be sure you’re paying attention to your spending habits and not basing your financial decisions on sunk costs. Here are a few other examples where sunk costs could be popping up in life:
- buying clothes you don’t necessarily want from Stitchfix to get the $20 credit (nope, that’s a sunk cost- you’re out $20 no matter what; no need to pay another $30 on top of that just to “recoup” your $20)
- traveling to a far-away store to look at/buy an item, then realizing that it’s not exactly what you wanted, but thinking you should buy it anyway since you already came all that way (nope, you already drove here and that’s a sunk cost- don’t try to make it “worth it” by forcing yourself to buy an item you don’t really even like)
- upgrading things on bigger purchases when you don’t really need the upgrade (ex. “well I’m already paying $400 for the phone, I might as well spend an extra $50 and get the bigger memory…”)
What would you do in this situation??
I think I’m leaning towards giving the hair stuff away or trying to sell it on eBay. Spending $10 for the shampoo isn’t a horrible idea, but generally I get $5 shampoo from Target that works just fine, so why spend extra money?