#32 Your College List: Financial Fit Transcript



Abigail Sussman  00:00

Just thinking about what is the incremental benefit of one particular choice over another? And is it worth the cost? So I think just taking a step back even to consider it a rational calculation, right, so maybe you’re saying, Look, I’m acknowledging that this is the rational calculation, and I am choosing to override that, because I’m talking to my child, and this is what they want. And I’m actively choosing to override this rational calculation. If you choose to do that, then that may represent your values. And that’s, that’s okay. But recognizing that there is this underlying cost benefit analysis, is a really important first step.


Lisa Marker Robbins  00:35

Paying for College is truly the intersection of psychology and finance. And that is exactly what dr. Abigail Sussman of the University of Chicago’s Booth School of Business has spent her career researching. As you head into what is likely a six figure investment into your child and their future. Abby shares with you the psychology of money and gives advice on how to think about this. So you avoid busting the budget and going into unnecessary debt. When emotions become elevated when your family works on and talks about paying for college. I’m Lisa marker Robbins and I want to welcome you to college, a Career Clarity, a flourish coaching production. Let’s dive right in to a great conversation. Today on the podcast, I am thrilled to welcome Dr. Abigail Sussman. She’s a professor of marketing at the University of Chicago Booth School of Business. And she does really neat research around the intersection of psychology, economics and finances her heart and the goal of her research is to help improve the financial well being of all of us. And so when I first became aware of Abby and thought, Oh, my God, I need to have her on the podcast, I thought who better to help than families with college bound students who are going to be spending a lot of money making a big financial decision and their new future. Abby, welcome to the podcast.


Abigail Sussman  02:14

Thanks so much for having me.


Lisa Marker Robbins  02:16

I am thrilled. So it’s hard to even know where to start. But I want to start with you kind of explaining the idea that I heard you talk about about mental accounting. And what that is.


Abigail Sussman  02:29

Mental accounting is basically the way that we as humans organize our money. So you can think about it as a parallel to financial accounting is how businesses organize their funds, and try to figure out what they should and shouldn’t be spending on. And individuals do the same thing in their daily lives. And so one of the things that makes this interesting is sort of understanding why we do it and what some of the consequences are. And so we do it. Because if we wanted to make a single decision about buying a tube of toothpaste, and we wanted to optimize that, from an economic perspective, we would have to understand what are all of our available resources and other expenses that we’re going to need to be pulling for those resources, both today and in the future. And it’s it’s basically an impossible optimization problem that we could try to solve for every single decision that we make. Or we could try to make this more tractable by essentially bucketing your money into different categories and trying to spend within these categories. And so therefore, rather than saying, How much money should I spend out of all possible money that I have, I’m only saying, Well, typically, I spend about this much money in the grocery store. And I can now think about this particular decision in the context of my grocery budget for this week, as opposed to my total expense budget for my entire life. It’s really overwhelming, really overwhelming. And so we basically use mental accounting as a way of simplifying our finances. And we can sort of map it onto a traditional budgeting process in terms of how we think about spending money. There are a variety of sort of consequences. But the main consequence, or the one that’s talked about the most, is that it leads us to treat money as though it’s not fungible. So what that means is that we end up treating money that we receive, let’s say, during as part of our regular income differently than money that we received. In a bonus at the end of the year, or as a Christmas present from a relative, we think about where we got money influencing the way that we spend it. And then we create budget categories, which then influences what we can spend the money on. So if I set aside a certain amount of money for spending on clothing, and let’s say, I’ve already spent all of my money on clothing, like I’ve already got all the clothes I want at the end of the month, but I have money left in my clothing budget, I might then go and actually spend more on clothes because I have this extra money available versus I’ve overspent on what I present is made up for eating out and so even though I want to have dinner out one more time at the end of the month, I’ve already spent that budget and so I might be less likely to spend in that category. Even if I have the same amount of surplus total budget leftist and


Lisa Marker Robbins  05:01

so interesting. So you’re talking about budgeting. And when I first became aware of your work, I thought, well, one of the problems that we encounter all the time in college planning, so if you talk to anybody working with high school families on that college bound journey is, how much should we save? What are the unknowns? What are the knowns, but even when they have a budget in mind? So often I see families get to that spring of the senior year. So it’s April, senior year. And I hear family say, Well, we’re going to break the budget. We’re gonna spend more, because we’ll figure it out. We’ll just figure it out somehow. And so as you’re talking about this, you know, making those decisions I Mike, I always get sad when a family I see them overspending, and I and I’ve met so many people, as I’m sure you have in your research, where it’s like they are saddled in debt from college, that they may never get out from under students and parents. And so like, what I heard you I was like, how do we help people have a different mindset or mental accounting, so that they get to that April of the senior year, and they make a wise decision instead of an unplanned or breaking the budget. overspending on college?


Abigail Sussman  06:32

There’s so much here. Right? Right. And so I think there, there are different pieces of it. So one is just did you plan properly? Did you realize how much college was going to cost initially, and maybe you underestimated that. So that’s one place where you could have a problem. Maybe I know how much it was going to cost, but I just there was no way I could realistically save the amount of money that I needed to save. So that’s sort of as the second piece of it. And then the third is to say, well, there actually is a certain amount that I think is the right amount to spend. And I’m going to ignore that and override that and say, well, this particular expense is so important that actually even though it’s more than I think I should be spending, I’m gonna spend on it anyway. And so I think you can see, those are, in some sense, three distinct components of this process that could all work together to lead people to blow their budget in this way. Right. So


Lisa Marker Robbins  07:18

if we have a family who didn’t save, I mean, we can’t unring that bell, because it has to start early. And we’re they’re not going to suddenly get the money. But when they’re setting a budget we had talked earlier about and I want to go down this road about sacred events, because I think perhaps this is influencing families, and when they break the budget on college, so talk to our listeners a little bit about what you taught me are sacred events, and how maybe this plays into to that.


Abigail Sussman  07:54

Yeah, so there are certain types of events, usually life events, that people are just willing to spend, essentially an unlimited amount of time. So you could think about spending on a wedding or spending on a funeral. And these are the sorts of things that just whatever it costs, I will find a way to come up with the money. If you resist that indulgence, then it’s not just that you’re being cheap, or you are being actually frugal or are wise with your money. It’s almost a moral outrage that you wouldn’t be willing to invest in your marriage. And so you can think about similarly, like when when a baby is born, the amount of money that new parents spend on newborn children and all of the things that newborns need for exactly three month period, each of these cases, you can think about both there being an actual need to make certain purchases. But this is coupled by really almost a moral need to be spending on certain types of events or certain types of applications. And so I think that it’s it’s likely that that in many cases that depending on who you are, and what your background is, that you could similarly be thinking about spending on college in this way that if I don’t spend, I don’t send my kid to exactly the place where they want to go, even if it costs four times as much. And it’s not totally obvious why that’s a better fit for them, or why that’s going to lead to better outcomes for them. But if I’m not willing to spend as much as it takes, then that makes me a bad parent. That’s one of the consequences that that it could have, to the extent that you think about spending on colleges as sacred in this way,


Lisa Marker Robbins  09:27

when you presented that term to me that feels as a mom myself, and I know you are too but my kids are in their 20s and you’re not yet at this college bound phase. It makes sense though, like there’s so many emotions wrapped up in that. And this idea of it being a sacred event. So I would say as a college advisor or as a college counselor, I would say to families, before you get too far down this road or before you’re hitting submit On applications, thinking about how sacred is this event, like my saying, Yes, I always say saying yes to something is always saying no to something else. And that’s how I present opportunities to my coaching clients. So when you say yes to college being a sacred event, and then the sky’s the limit on the budget, what are you saying no to? Are you saying no to your own retirement savings? Are you saying no to this next kid? I mean, I encourage families when they’re talking about college funding to not think of it in a silo with that one kiddo, you know, you’ve got to write, and I’ve got three, so you’ve got to take it globally as all of the kids that what will it take to get all of them through? If we start with the first one being a sacred event, then oh, gosh, then the next one is going to be a sacred event. And then the train can really go off the track.


Abigail Sussman  10:53

And I think part of the point is, it’s also it’s not like you’re choosing college versus not college, you’re there are many, many different decision points along the way. And so just thinking about what is the incremental benefit of one particular choice over another? And is it worth the cost? So I think just taking a step back, even to consider it a rational calculation, right? So maybe you’re saying, Look, I’m acknowledging that this is the rational calculation, and I am choosing to override that, because I’m talking to my child, and this is what they want. And I’m actively choosing to override this rational calculation. If you choose to do that, then that may represent your values. And that’s, that’s okay. But recognizing that there is this underlying cost benefit analysis, is a really important first step to saying well, actually, maybe like it will be better off going to a school that actually, maybe there’s a reason why it’s cheap, like it will be less expensive, maybe it’s because it’s a better match actually, in that maybe the school will be provide more support, because it’s a better match for my child or something along those lines. And so I think just making sure that you’re understanding both what is the rational element, and what is the emotional element and how those two interact, and how you want them to interact in your decision making,


Lisa Marker Robbins  11:59

I think a lot of families don’t start to have that conversation until they those acceptances are coming in. I mean, we used to wait for the isn’t a thick envelope or a thin envelope, and those days are long gone. When you open that email, what does it say? Or when you log into the portal, and if the conversations waiting until then that’s gonna be wrought with emotion, rather than really thinking through what you’re teaching us on the front end being more intentional. I love that you’re teaching us this because we can have these early conversations. One of the things that I do with my clients is I say, okay, Mom and Dad, you are getting ready to spend six figures on college most are that I’m working with. And you have every right to say, hey, once a week, we’re gonna sit down with my sophomore, junior senior, and we’re gonna have a college bound conversation, or we’re going to do something related to this, we’re going to be very intentional with our time. And so building what you’re saying, is this a sacred event? And is this the sky’s the limit? Or is it not what’s right for our family and what’s right for this particular kid, and what aligns with their values, their goals, and their their end goal of college supposed to get us to a career, right? Yeah, and


Abigail Sussman  13:12

I love what you’re saying also about sort of having these very deliberate conversations along the way. So in my world we talk about you can be in a hot state or a cold state. And so the basic idea is, don’t go to the supermarket shopping when you’re starving, because you’ll end up just buying, you know, Doritos and ice cream and going home and eating it. Yeah. Right. So first is, you know, go to the supermarket after lunch, when you can be thoughtful about what you want to purchase. And it’s the same thing with money, right? So if you wait until you get the email notification about a particular school to have that conversation, you’re gonna be in a hot state, right? You’re gonna, you’re gonna be very emotional about it. So the extent to which you can plan for that in advance is gonna be really valuable.


Lisa Marker Robbins  13:49

Whoo, I love those terms. Hot state cold state. I’m stealing them Abby. And you’re not mine. Good. You’re like usable way. I didn’t admit at least. So I heard you previously talk about this idea that we read, somehow rationalize, oh, you know, tell the story, because I’ll screw it up. Talk about the $13 Hot dog at the stadium. I’m going to just lead with that and let you explain it to our listeners.


Abigail Sussman  14:21

Yeah. So they’re, in my research, I look at this idea of exceptional expenses. And so these are one time or infrequent purchases. And there are two paths to why we would want to spend more on them. So one is just from a motivational perspective. So let’s say I’m thinking about buying a hot dog at a baseball game, and just $13 And that seems really expensive to me, but I really want it because it’s this it’s so special, right? It’s this special event and I I just want to indulge at this particular moment in time. So that’s one reason why we might spend more than we normally would on a hotdog and a baseball game. But there’s a separate path, which is also more of a cognitive for perspective, which is just how we categorize the world and how we think about budgeting for the world. And here, this path is, I think, a little bit more dangerous, or at least, you might be less likely to be aware of it, which is that when I think about this particular defense, I think about it in isolation. And so I say, yes, it’s more than I would normally spend. But how often am I at a baseball game? And thinking about spending extra money on this hotdog, right? And so you say, well, it’s only you know, once a year, do I go to this baseball game, and money. And so basically, it’s been hotdog, we’re $26 or $52, it doesn’t really matter, because it just happens once in a blue moon. And so it’s fine. On its face, that actually kind of makes sense, right? So even $50, once a year is not going to be the end of the world. But what happens is that there are lots of different expenses that happen only once or only a couple of times a year. And so when we think about not having a category for hotdogs at a baseball game, but instead we create a new category, which is now for all of the things that I spend money on only once a year, that ends up adding up quite a bit. And so one of the ways that we can end up overspending by a lot is by essentially failing to recognize that even one time expenses happen quite a lot. When we think about the category of one time expenses,


Lisa Marker Robbins  16:23

you know, as you share that everybody’s probably going well, college isn’t, you know, it’s four years. But I think as I have conversations with families, I hear them like it’s an experience. So that college experience is a one time a once in a lifetime. And it’s a gift that we’re giving our kids before we send them launch them off into the world. So I could see it getting categorized that way. Right. So then it’s a it’s okay to, to spend $50 on the hot dog or whatever, on college, you know, and everybody’s budget is gonna be different. But I think starting with your budget to realize what’s affordable, what makes sense for our family, what aligns with our values for son about right or wrong, that is figuring out what works and should be for your family. Before you get to that hot state in the spring of the senior year. Yeah, absolutely. Or hot state could even be fall of the senior year when they’re hitting submit, you know, when they’re finally that curated list, because once you’ve hit submit, and we pass the deadlines, we can’t add more colleges. So really, by the summer between that junior and senior year, we’re getting warm and nearing our hot state. Yeah, absolutely. You have a project rule about the 20% rule that you and I were talking before we came on to record about like, could this work for college? What do we think so share the 20% rule with our families? Yeah,


Abigail Sussman  17:53

so I think that I was first talking about this in the context of like a home construction project, where the basic idea is that things end up costing much more than you expect them to. And the more small component pieces that you have to fit together, the more things are likely to go over budget. And we can think that either when we’re talking about just planning for the year or planning to go on a vacation where we might not think about all of the different associated costs. And so for me, I like to think about just adding 20% to whatever I expect the cost to be, you could have a much more methodical approach, where you actually just try to make sure that you’re including everything, but what I found for myself is that I almost never can think of all of the extra things. And so just adding a buffer is really helpful to get a better estimate of what I think the costs are going to end up being.


Lisa Marker Robbins  18:38

So your recommended buffer would be 20%.


Abigail Sussman  18:42

Yeah, I mean, it depends on I think you probably have a better sense of if people are at baseline most likely to think about the cost of tuition, but not also the cost of room and board and textbooks and other sorts of fees. I don’t know what the right ratio is, you might have a better sense of if that’s 20%. Or if maybe it’s more or less than that for this particular context. 20% It’s a rule of thumb. So it’s definitely not going to be perfect, but often it works pretty well.


Lisa Marker Robbins  19:08

I think it could because a lot of families go in thinking only like, oh, tuition plus housing, they don’t realize they’re charging you to go to orientation, and you have to go to orientation, and they’re gonna charge you for it. Welcome. Now you’re here. Your fees vary greatly by major, you were in a major that did not have a ton of fees, probably but an engineering major or a chemistry major has a lot of lab fees, it’s going to be more expensive to do that education. So textbooks will vary by major or if you have to buy certain software, certain computer. So you’ve got that but then all of that goes into cost of attendance, which legally has to be made available to families, but it’s still an estimate. I remember when my daughter who’s entering her junior year of college was going as a freshman And, you know, they had this what you can expect for room and board and there was an over $4,000 difference between the least expensive dorm and the most expensive dorm. So huge range. And now that you’ve introduced us do stairs to the idea of sacred events, and like, oh, well, you only have one freshman year, and they’re going to meet their friends that year. And now all of a sudden, do I go with the, you know, the $10,000, a year dorm or the $15,000, a year dorm feels sacred?


Abigail Sussman  20:34

Right? You’re only you’re only going through this once? And don’t you care about your child? That’s right.


Lisa Marker Robbins  20:39

So based on your research, do you have advice for families? I mean, we have said, like, let’s make these decisions while we’re in a cold state, not a hot state. And I would add, because you just work with research, and you’re studying our mindset around all these things. And I would say as a person who works in the college planning space, that time to be in a cold state is probably sophomore year through maybe only even first semester junior year, and then you’re at least in a warm state, hot state, definitely by senior year. So I love that advice. And I would align that with that, that kind of timeline. I mean, I have a link to it in the show notes, but a college planning timeline for our families to kind of guide year by year what that looks like. So by spring of junior year, you’re in a warm state, do you have other advice that you think would be most helpful that we could leave families with as they’re planning their, their mental accounting?


Abigail Sussman  21:37

Yeah, I mean, I actually think that piece of advice that you just gave a couple of minutes ago about thinking about everything that you say yes to is actually something else that you’re saying no to. And so this is what we call is opportunity costs, neglect. And so people tend to not consider opportunity costs. And so what am I going to write if I, if I say yes to this, what am I saying no to you, to the extent that we do have a limited amount of resources to dedicate, maybe not to our first child’s education, but maybe to our second child’s education, we loved them too. And so trying to to really understand what are the opportunity costs, because we don’t spontaneously consider opportunity costs in most cases. And so recognizing what the trade offs are, I think, is going to be really important. And so that’s another piece of advice that I think I’ve just echo that you gaze that I think is so powerful, and is not intuitive at all, because it’s so easy to just get lost in the moment and to be focusing on the reason why this is so important. There’s nothing else that could possibly be as important, when if you stop to think about it, actually, maybe there are other things that are as important. And I think more than that, really focusing on what are incremental benefits and incremental costs of each, each of these choices? because to the extent that there are a series of choices of, you know, what is the dorm that my child is going to live in? And you know, what are the costs of particular majors? And what are the costs of particular majors at one school compared to another school, in each of these cases, you don’t have to make an all or nothing decision. It’s not as though like, well, I’ve already decided that we’re gonna go to this college. And so therefore, we need to spend the most possible on every single sub decision at this college where, you know, on the flip side, maybe we’ve decided that we’re going to go to college that’s more affordable. And that’s going to give us flexibility, one of the benefits is that then we’ll be able to be freer in our spending on some of these other elements, we’re not going to be have to be as focused on every single decision along the way, because we cut back upfront, and I think often when we think about costs and fit by finding the right fit for you, you can often achieve really high quality without necessarily needing to trade off on a sort of more cost efficient level.


Lisa Marker Robbins  23:53

Yeah, I agree. I think people get caught up in the brand name, sight of that to a greater degree than they need to and study after study shows that if you look at like the top Fortune 100 500 list, you see a wide variety of institutions that the people who are leading doing very well, leading big organizations came from, the Ivy’s are on they’re down to the state, whatever school or even a community college start. So


Abigail Sussman  24:27

I think thinking very specifically about what your particular goals are, it’s gonna be critical to I one


Lisa Marker Robbins  24:32

time had a student that I was working with who she very proudly got into Vanderbilt, a great institution, super excited, but she was going into education. She was going she wanted to be an elementary teacher and for her family. This was one of those. They were in a hot state. It was April, senior year, and they came to me and they’re like, we’ll work it out. And I just had to say, You just told me that she’s gonna graduate with $80,000 in debt, and she wants to go into this was about 15 or 20 years ago, but she’s going into a very wonderful profession and she’s going to help him be amazing. But she’s going to have a very hard time getting out from under that dead ever. And so don’t make that decision in the hot state. She ended up not going to Vanderbilt, and I said, hey, you’ve got bragging rights rest of your life. Well, Abby Sussman I knew it was gonna go too fast. But I thank you for making time for saying yes to College and Career Clarity and helping families. Thanks for being on.


Abigail Sussman  25:41

Thanks so much for having me.


Lisa Marker Robbins  25:45

I have to believe that Abby’s advice will save you both angst with your teenager and money on college by helping you set a firm college budget before you emotionally hit a hot state that might be hitting submit on college applications or opening acceptance emails. Those days are coming and there’s no pause button on the college bound journey. My weekly college bound challenge for your family discussion time this week is one of those uncomfortable ones. It’s time no matter what year your teen is in high school to start discussing who is paying for college? how much and where will that money come from. So have the discussion. And while you may not yet be able to make a final decision on how much you are willing to spend, you can set a date by which you will make that decision. And I strongly encourage you for that date to be before your student starts college applications. And you’re entering a warm state or the hot state on making that final decision. If today’s episode was helpful to you, please share with a friend who needs us to sharing following the podcast rating and reviewing helps us resource more students to launch into a successful future. That’s my life’s work. Thank you for listening to the College and Career Clarity podcast, where I help your family move from overwhelmed, confused to motivated clear and competent about your teens future