Tightwad Nation

George Loewenstein is a professor of economics and psychology at Carnegie Mellon University. His research into spending decisions resulted in a scale that measures your propensity to overspend or underspend.

KIPLINGER'S: How does your research change the way we think about spending money?

LOEWENSTEIN: The standard view of spending decisions is that they're a trade-off between making a purchase versus finding alternative uses for the money -- current pleasure versus future pleasure. We've looked at actual brain scans and found that it's more of a trade-off between the immediate pleasure of the purchase versus the immediate pain of paying for it. Everyone experiences the pain of paying, but spendthrifts feel it much less and tightwads hurt much more.

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It's better to be the latter than the former, right? Don't get me wrong -- the low level of savings in this country is a legitimate problem. But there are people whose lives get derailed because they won't spend money on things that are important. They go to their grave without enjoying the fruits of their earnings. Everyone wishes they'd figured out a way to enjoy the money, but no one but the bank gets paid.

Surely these folks are few and far between. We hear so much about overspending these days. But when we interview people, we generally find that there are more who have a problem spending money. There are a lot of closet tightwads. We've interviewed well over 7,000 subjects. On our scale, the majority of people fall close to the center. But at the extremes, we find that tightwads outnumber spendthrifts.

What can tightwads do to loosen up? If you have trouble spending on luxuries, such as cabs, restaurants or vacations, you can set up a mental account, or even an actual bank account. Make an executive decision that the money in the account will be spent on entertainment, and if you don't spend the money, it's not going into savings. Also, consider a purchase an investment, if you can. If you think of buying a gift as investing in a relationship, it's less painful.