The a la carte method for saving money

Ramit Sethi has an interesting blog post, “The A La Carte Method: Use Psychology Against Yourself to Save Money.” The method, which Sethi, author of the forthcoming I Will Teach You to Be Rich, says was partially inspired by ideas in Nudge, instructs wannabe savers to cut out major subscriptions in their lives (Netflix, cable, gym, magazines, Amazon Prime, fruit of the month, etc.) and instead pay for them one visit or item at a time, preferably using cash. (It’s similar to the paygo idea in politics where politicians promise to spend money on programs only when they have guaranteed tax revenue to fund them.) A la carte succeeds by making costs salient, at the small cost of making life less automatic.

…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.

Overall, the Nudge blog likes the a la carte idea a lot, with a small caveat. Sethi doesn’t spend much time talking about how to keep small costs salient for the entire month. He recommends starting out by cutting out 1-3 major discretionary subscriptions, and then leaps right to the end by saying you should check how much you’ve spent on those products one month later. Alternatively, he says you could calculate how much the subscriptions cost, and then set a limit to spend say 90 % of the total over the next month. Again, check how you’ve done in 30 days.

In order for the a la carte method to work well, the salience of the overall budget needs, at all times, to be as salient as the cash shelled out on a daily basis. The worry is that if I’ve saved $200 a month by cutting out Netflix, a gym membership, and a subscription to my favorite magazine, a few $5 movie rentals here or there probably won’t seem too painful, especially early in the month, even if I’ve blown over my Netflix subscription cost because, after all, I’ve just cut my expenses dramatically. The danger of a la carte is the small amounts spent on individual products relative to the overall large budget. Unless I am keeping my receipts in a visible place, or checking an Excel spreadsheet every morning, it could be easy to forget exactly how many $5 movies or magazines I’ve bought. At the end of the month, I may find out I haven’t saved that much. Depending on how good my short-term memory is, I may find out I overspent.

Mental accounting is how most people treat expenses, but using it prescriptively to help save money works best when the accounts are jars sitting in your kitchen, a la Dustin Hoffman. Literally putting cash in the amount of subscriptions into a jar and using that money for subscription goods would be the low-tech way of keeping the overall budget in mind. A high-tech option might be a cell phone widget that keeps track of small budgets. You input a $200 budget, and each day the widget reminds you to subtract the amount of money you spent on subscription products. When the budget gets low, say $25 or less, the widget could transmit a flashing red warning signal as a reminder. A la carte is an attractive idea. The Nudge blog just thinks filling in some details will make it even better.