Humankind is not known for its ability to reign-in its desires, and how we deal with our finances is not an exception. Let’s face it, nobody really needs a Fabergé egg decorating their fireplace, but our spending habits do not only depend on what we need, but also on our wants and desires.
Why Do We Overspend
There are many reasons why our spending lands us in serious financial difficulty. Spending more than we earn is a trap that many of us continue to fall in, and the psychology behind unhealthy financial behaviors might be obvious, yet it remains complex. So, is it all about keeping up with the Jones’; is it about capitalism and its pressures, or a combination of all the aforementioned?
There are many complicated mechanisms that drive us head first into financial peril. Some of them are easy to identify and learn to manage; others are more insidious and easily ignored until we are in serious trouble. Debt Reviews has identified a few of the psychological mechanisms that are responsible for our spending habits.
Decisions Limit Opportunity
If one buys an expensive cologne on a shoestring budget, their spending opportunities are automatically reduced significantly. In layman’s terms buying that cologne means that the money spent on it, cannot be allocated on anything else until one’s next wage comes in. Thus the decision to buy the cologne has significantly limited the opportunity one would have had to purchase something else instead.
Unless your monthly budget is quite sizable, chances are that such decisions have to be made after great deliberation, and not on a whim. Hasty financial decisions are not only dangerous to your wallet, but they can also cause a landslide of recurring bad decisions which might land you in financial difficulty.
When one’s wage reaches their account, they have already mentally spent the money, which is a process usually dependent on their monthly outgoings. We all do a sort of “mental accounting” which allocates specific amounts of the money we earn, to cover regular outgoing expenses. This mental accounting usually involved allocating sums of money for regular outgoings, such as rent or mortgage payments, credit cards, loans, food bills etc.,
Now imagine if one suddenly finds themselves with a bit of extra money that month. The money might have appeared in their bank account in the form of a birthday present, or a scratch card win. When our mental accounting has already satisfied our outgoings for that month, our brain perceives that extra money as “free” money, which it tells us we can spend on anything we want.
For example, let’s imagine that someone has a regular monthly loan payment of $100. If they are keeping on top of their finances, this means that chances are they have already allocated an amount of their monthly income to cover that loan payment. If that individual suddenly wins $100 on a scratch card, instead of paying an extra amount off their loan, they will consider this money as “fee money” which they can then spend on anything they want.
This is a very common behavior, seen predominantly in younger individuals, albeit not exclusively. The mechanisms behind this behavior might include the production of dopamine, which is responsible for that feeling of elation we associate with winning on things like the lottery, a raffle etc.,
Don’t go spending all your lottery wins on that liar jet though, or financial peril awaits around the corner.
The Curse of Christmas
The aforementioned “keeping up with the Jones’” situation is definitely more prominent during the Christmas period. Buying one’s kids the latest console, or laptop for Christmas, can set them back several hundreds of dollars, money which they might not have to spare.
This insatiable consumerist need can blind people to the fact that they might not be able to afford all of the aforementioned luxuries, leading them to use high-interest credit, which in turn might be proven damaging, as their monthly outgoings will increase for many months to come. This, as we all know, is a slippery slope. Happy Christmas everyone!
That old chestnut. Is it better to strive for something we want minimizing the consequences to our bank account, or go all out and use more of our credit for that amazing hit instant gratification provides us with?
Imagine walking along a busy street, shops everywhere, when you suddenly spot the most incredible red dress you have ever laid eyes upon. Only problem being you would need to save up for three months in order for you to be able to afford it. What do you do? Do you wait and save up for three months, counting every penny like a new Ebenezer Scrooge, or do you present your “overworked” credit card and get it there and then?
The psychological mechanisms of instant gratification are almighty and extremely powerful. The pull of instant gratification can lead certain individuals to substance abuse, overeating and generally cause mayhem in their life.
Saving to buy a house can take years, while buying that red dress can happen now! Who cares about the house, it will find a way to buy itself. Well it won’t, and if you are indeed victim to the perils of instant gratification, it would be useful to unpack the reasons behind that behavior and work on ways to restrict the urge.
Cash vs Credit
This will not come as a surprise to anyone. Spending virtual money on a credit card, somehow does not feel the same as spending cash, making it much easier to overspend. If your goal is to reduce your spending, starting to use cards might be a good idea.
Using a credit card still provides us with the pleasure of a new purchase, but it somehow alleviates the pain of paying. This is a more prominent behavior than you might think, with certain individuals refusing to mentally accept that their debt is real, if all they see is digital numbers on a screen, or a piece of paper. So, in other words, the way forward is to stop using plastic.
Willpower, or Lack Thereof
Most of our shopping decisions are made in store isles, this is why a shopping trip for bread can easily end with a $100 bill for some of us. It is not easy to exercise self-control sometimes, and this behavior is also not limited to the way we handle money and our financial affairs. Lack of willpower will lead us to many dark paths and will ensure we make wrong decisions on many aspects of our life.
There are many ways to exercise our willpower, some of them include planning ahead, creating lists and limiting the number of items we buy on any single shopping trip.