Let's face it - we all buy things. Things we need. Things we do not need. Think we do not know we need. What is need?
We can't talk about managing finance without tackling the fundamental temporaral characteristic of money in a bank account - it goes away. And the more of it a person makes, the more seems to go away. There are different kinds of spending - the non-negotiable expenditures like housing and food, the semi-negotiables ones like a bigger house and buying truffles in the groceries and the optional ones of a water fountain in a house and fine dining. The optional ones are important too - there is a link between happiness and consumption after all. Anyone who has splurged on a new pair of shoes or a new gadget can testify to the rush of satisfaction afterward. And research proves that spending money does make you happier. But is is important to understand the trade-offs between happiness, and well having more money in your bank account.
There are so many questions that revolve around spending - long term vs short term benefits, experiences vs materials, personal vs social benefits. What causes our need to spend?
Even though we like to think of ourselves as rational, thoughtful creatures, the truth is, most of the decisions we make about money are anything but rational. We all overspend, we all ignore our budgets and we all impulse buy. In fact, the way all humans make decisions — especially the decisions we make about money — isn’t very rational at all.
Psychology of Spending Habits: How We Make Spending Decisions
Before we look at how we decide to spend money, it’s important to get a quick understanding of how our brains make decisions on a day-to-day basis. In the late 1950s, psychologists argued that every decision we ever make, whether that’s about who to marry or what coffee to order, is dictated by complete and utter rationality. And to this day, that’s how most of us think of ourselves; as careful thinkers that make all of our decisions based on reason, not emotion and certainly not laziness. However, in the 1980s, psychologists Susan Fiske and Shelley Taylor claimed that we humans don’t make rational decisions at all. Instead, our brains are incredibly lazy and will always choose the decision that is the simplest and requires the least amount of effort. Your actions are almost always decided by a set of unconscious and automatic processes our brains have picked up and developed from when we were children. It doesn’t matter if we’re talking about something of relatively little importance (like which t-shirt to buy) or a massive life-changing decision (like choosing a partner), we’re hard-wired to take cognitive shortcuts whenever we can and as often as we can to save our brain the effort.
And the same thing applies to how we spend money, too. In fact, Harvard Researcher Gerald Zaltman says in his book How Consumers Think that “when it comes to buying, 95% of our decision making takes place in the unconscious mind”. Now, millions of words have been written on the psychology of spending habits and how we make decisions (if you’re interested, we highly recommend reading Thinking, Fast and Slow by Daniel Kahneman. It won the Nobel Prize a few years ago).
Things that make us want to spend money #1: Delayed Reward Discounting
Imagine this:
You’re in a shop and you see something that you really want (but don’t really need) for $30 or so. At the same time, you’re trying to save every penny you can to go on holiday in a few months time.
What do you do? Do you treat yourself today or put the money away for the holiday of a lifetime?
If you chose to treat yourself (and be honest!) then you’ve just felt the effects of the psychological phenomenon called Delayed Reward Discounting, where your brain automatically chooses smaller, more immediate rewards over larger rewards that you have to wait for.
And, interestingly, learning to fight against this phenomenon is crucial to forming good money habits. At its core, Delayed Reward Discounting is all about impulse control and making sure you make sensible — not irrational — money decisions. (More on that later.)
Things that make us want to spend money #2: Scarcity
Imagine this:
You’re on a holiday website shopping around and you notice that there’s only one room left at one of the hotels right near the beach. However, you haven’t finished looking at all the hotels yet, so you’re not sure whether this is the best hotel available…
What do you do? Do you keep looking around for different hotels or do you quickly book the room so you don’t miss out?
If you whipped out your card and booked the room lickety-split, you’ve just acted based on scarcity, rather than logic. And that’s perfectly natural. Our brains are hardwired to be in an almost permanent state of FOMO.
Marketers and retailers are well aware that we flash the cash when things are scarce, so its easy for them to manipulare false scarcity to urge people to spend their money.
Things that make us want to spend money #3: Social pressure
Imagine this:
You’ve set yourself a budget of $20 for a night out with your friends. After spending that $20, your friends ask you to get insomnia cookies with them. You don’t want to spend more, but you also don’t want to miss out or be left out…
Or this:
You’re out on a shopping trip with friends. You’ve set yourself another budget, but your friends want to stop for coffee and lunch while you’re out. Getting coffee and lunch would put you well over your budget for the day.
Do you stay for a cookie or go for coffee and lunch? If you said yes, you’re not alone. Our brains are designed to help us fit in — in fact, some psychologists call this the herd instinct — and sometimes, that makes us spend more money. In fact, it’s not uncommon for us to completely overspend when we’re with other people because we naturally start to mimic their behaviour.
Psychological Tricks To Help Stop Spending Money
1. A cash-only diet
Behavioural economist Dan Ariely published that we feel more pain — like actual pangs of psychological pain that’s similar to guilt — when we pay for things in cash compared to card. Similarly, we feel pain when we get instant notifications after we’ve spent money too.
Interestingly, we can use this guilt and pain to curb our spending habits a little.
In those three scenarios, we discussed earlier — treating yourself vs saving for a holiday, booking a room vs waiting and spending more when you’re with friends — using cash instead of card is likely to come with enough of a pang of pain to make you think twice and make a rational decision.
That pain shakes your brain from its habit of using lazy shortcuts and forces it to make a more rational decision.
2. Understanding whether our spending has a deeper meaning
If you have a tendency to treat yourself to a new outfit or makeup when you’re under emotional stress—or maybe you have indeed purchased those red leather thigh-high boots—that’s not necessarily a major cause for concern. “A little emotional spending can be good for the soul,” says Dr. Forman. However, when it becomes a primary coping mechanism there could be dire consequences, such as out of control debt.
If you feel that your emotional spending is getting out of control, finding other ways to deal with stress, anxiety, and depression is key. Instead of shopping, try journaling, meditating, or talking to a therapist to help. I realize that contrary to what many believe, feelings pass, and with time so will the feelings for the red leather thigh-high boots. Give yourself the gift of sitting with your emotions without needing to make them go away. And worst case scenario, if they don't go in a week - go grab the pair. And if it's sold out, don't worry a better model will soon surface in the market.
The first step in shifting any pattern is recognizing that you’re engaging in a behavior that doesn’t serve you. As you start to recognize the pattern you can practice putting in place interventions to start to shift it. For example, noticing that you’re feeling low after a long day and realizing you’ve opened your phone to shop, you might choose instead to remind yourself of your goals for your spending or your time, step back from the phone, and go for a walk.
This applies to things way beyond and bigger than red leather thigh-high boots, and especially to addictive expenditures.
3. History repeats
If you've created a budget ( as this post looks at), look at your significant expenses. You would be surprised on how much you may have spent on some categories. Reflect on whether they were actually as useful as you thought they would be when you spent the money. If not, you know what to look out for in the future.
4. The curse of mental accounting
If you're still not convinced to make a budget plan, I present the problem of mental accounting - dividing your money into separate mental accounts, such as accounts for food, clothes, rent, school supplies, indulgence, and the like as elaborated my economists Thaler & Sunstein in their 2008 paper, Nudge: Improving Decisions About Health, Wealth, and Happiness. Spending is constrained by the amount in different accounts. That is, we only consider the opportunity costs within a specific account without looking at the bigger picture. For example, you get birthday money. You know you are behind on student loans and part of you knows you should spend the money on that. But why do you feel reluctant to do so? It is common to perceive the birthday gift as “free” money. The alternative to having mental accounts is to consciously compare all your purchases.
5. Special occasion
With Christmas around the corner its very apt to bring up our tendency to overspend on “special occasions”, because we don't keep track of just how many of them we have. Failure to incorporate an exceptional purchase into our budget as one in a series of special purchases can encourage overspending. You can budget for infrequent expenses by creating special savings accounts earmarked specifically, say, for birthdays.
6. Present bias
Present bias occurs when individuals place extra weight on more immediate rewards than those in the future. For example, my future self may want to buy a home, but my present self wants to splurge on a tropical vacation. The more we disregard our longer-term interests in favor of immediate gratification, the more likely that we will have the overspending problem. It also explains why people have an easier time spending money on credit cards as opposed to spending real money. Paying with cash is more painful than paying with credit cards. The main psychological force of credit cards is that they separate the pleasure of buying from the pain of paying. So if you want to get your spending under control, it may help to stop using credit cards during shopping trips.
7. The “what the hell” effect
The so-called “what-the-hell" effect suggests that falling off the wagon causes a feeling of failure, which leads to more indulgence. This is a case when minor lapses snowball into self-control collapse (“If I’ve already blown it, I might as well go all the way”). For example, an amount, say, $100 for dinner in the context of a $3,000 monthly credit card bill seems smaller, less significant, and less painful than it does on its own.
Wrapping Up
It was at point 5 that I realized that I can keep going with this list but I thought "what the hell" it is already pretty long and so a few more points wouldn't hurt. But now I do think I am ready to tie up this article with a thought.
Spending money on yourself is more than okay. As long as you don't overspend, you should spend money on yourself. Life can be such a whirlwind and treating yourself is something worth doing amidst it all. Whether it be a new book, a face mask, or a scuba diving trip, if it makes you feel good it's already proving its worth.
A big reason why people feel guilty about spending money is they fear that it could be going towards something better or more important. And I guarantee you, there is always something better and more important. It is important to not worry about spending and you can do that if you feel more certain about your expenditures and choices at the moment you makes them.
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