Thursday, March 24, 2011

Letting Go of Sunk Costs

Tip of the Week, March 13, 2011

Think about the contents of your closets, drawers, cupboards, and shelves: what's lurking there not because you need it, use it, love it, or even necessarily want it, but simply because you "paid good money" for it and are therefore reluctant to get rid of it? As a recent article on LearnVest (a website with resources and information on finances and money management) explains, holding onto something-or doing an activity you don't really want to do, or-only because you spent money on it means you're getting caught up in a sunk cost.

Recognizing sunk costs, making peace with dealing with those you've already encountered, and learning how to avoid them in the future will help not only ease strain on your finances, but will also let you take a new approach to decluttering.

What Are Sunk Costs?
According to the LearnVest article, "'Sunk costs' is the economic principle that what you have spent is already gone." That is, whether you regularly wear the $200 sweater you bought or never wear it, you've still spent $200. Keeping that sweater around without ever wearing it means, as psychiatrist Robert Leahy explains, means that you're "honoring the sunk cost" of the item.

Holding onto things that represent sunk costs may make you feel like you're somehow getting your money's worth, but chances are that won't happen; instead, repeatedly encountering items on which you feel like you've wasted money will simply bring up regret about that wasted money time and again.

I see this happen with my clients on a regular basis: when we work on sorting and weeding, they'll come across stuff they've been keeping in an attempt to honor or overcome the sunk cost. What adds insult to injury is that each time they see this stuff, they feel guilt, regret, annoyance, or frustration at the money they spent on it.

Making Peace with Sunk Costs
The hard truth about sunk costs is that trying to squeeze value out of them almost always backfires. You won't feel any better about the $200 you spent on that unworn sweater by letting it loiter in your closet, taunting you each time you see it. Though it's by no means easy to cut your losses and let go of items that represent sunk costs, doing so will not only free you of clutter, but will also allow you to let go of the negative emotions that come along with expenses you regret.

The first step in making peace with sunk costs is recognizing them: What are the things you're keeping (or the activities you're allowing to remain on your calendar) only because they cost money, not because they're actually useful or appealing to you? Once you've determined your sunk costs, commit to letting go of them, whether by donating or selling them (or, in the case of events or activities, by canceling or simply avoiding them), and also to giving yourself permission to let go of any anger, guilt, shame, or remorse that go along with them.

Finally, recognize what caused the sunk costs in the first place: were they impulse buys? Things you acquired without really considering whether you wanted or needed them? Things you spent money on because you felt pressured to do so by someone else? Understanding what's behind your sunk costs will help you steer clear of similar mistakes in the future.

Avoiding More Sunk Costs
After you've let go of and made peace with your past sunk costs, focus on avoiding more of the same. Carefully consider new purchases, especially expensive ones. If your sunk costs were triggered by pressure or negative encouragement from someone else, aim to avoid allowing your purchasing decisions to be influenced by that person going forward. Did you buy sunk costs items on impulse? Try instituting a 24-hour waiting period before making non-critical purchases so you'll have the chance to approach them more clearly and rationally.

Benefits
Recognizing, making peace with, and overcoming sunk costs you've already encountered can be important steps in uncluttering your life. I often see clients who decide to part with sunk-cost stuff gain the confidence and motivation needed to clear out other unwanted stuff from their lives. They also tend to feel happier and more in control when they've gotten past the related negative emotions.

In addition, once you recognize what's behind your previous sunk costs, you'll be well positioned to avoid new ones, which will help keep future clutter at bay-not to mention help keep your finances in check.

Here's to letting go of your sunk costs and finding more fulfillment in the things and activities that deserve space and time in your life because they're useful, meaningful, and enjoyable to you, not just because they cost money.

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