You know, before I went all corporate in college, I genuinely did have an interest in the intersection between psychology and money. I took multiple courses related to psychology to the point of nearly minoring in it.
I believe that understanding the “why” behind our relationship with money will bring us a step closer to being able to manage our finances more effectively. Our behavior and emotions greatly influence our financial decision-making and this often leads to impulsive buying and overspending.
In this blog post, we will go over some of the factors that shape our spending behavior and begin to figure out a way we can help ourselves regain control over our finances.
Factors Influencing Spending Behavior
There are multiple factors that influence our spending behavior. I will name a few that I have found in my own day-to-day life that are worth mentioning;
Social and Cultural Influences:
Our spending behavior is heavily influenced by societal and cultural norms. Peer pressure, societal expectations, and advertising all contribute to our desire for certain products or lifestyles.
In a previous post I brought up the infamous “Because Tik Tok made me buy it” phrase I’ve heard one too many times. It comes as no surprise that the largest social and cultural influence to date comes in digital form and is accessed at the palms of our hands. I know we have all heard the woes of those who critique social media as being both one of the greatest connectors known to humankind (at least in our time) and also a potential society and culture bomb!
Regardless of your opinion on social media, its influence is undeniable and definitely plays a key role in how we understand wealth and idealize certain lifestyles over others.
Being aware of these influences allows us to make more conscious choices aligned with our values and financial goals.
Emotional Triggers and Impulsive Buying:
Emotions play a significant role in our spending decisions. Have you ever had one of those days you want to be able to magically teleport from wherever you are into your bedroom and hide under your covers and scroll mindlessly through your phone or tablet?
No? Just me?… Alrighty then.
Or did you have an argument with your spouse, a friend, or a colleague at work that is just pounding on the very last nerve you have?
Raise your virtual hand if you can recall that one purchase that still makes you question what was in your drink that day!
What I’m getting at is that stress, boredom, or even a desire for instant gratification can trigger impulsive buying. By recognizing these emotional triggers, we can develop healthier coping mechanisms and avoid impulsive purchases that may lead to financial regrets.
Cognitive Biases
Cognitive biases, like the anchoring effect, can distort our perception of value and influence our spending behavior.
For example, if I saw a bag of chips worth $10 (which is possible in this hyperinflationary economy) and then I saw another bag worth $8, the $10 bag would act as this “anchor” for how I perceive the value of the second bag. In this case, the second bag of chips seems like a better deal price-wise. But, that might now be the case since you can leave the entire store and find a different one where the price of the bag of chips is actually $2.
The anchoring effect has the same issues as the primacy effect, where the first thing you see acts as the point of reference for how you perceive the rest of the items and their price points after.
The challenge is that we don't have the time or energy to look through every possible option for the price of an item, and so we give in to the cognitive biases we have and choose what we think is the best option for us when presented with the decision.
Why is this an issue? Well, these biases often lead to irrational decision-making, causing us to overspend or make poor financial choices. Developing an understanding of these biases enables us to make more objective and rational financial decisions. I will caveat and say that at the cost of putting in more time to get the better deal.
If you are interested in learning more about the anchoring effect, check out this Harvard Article that discusses it in the context of negotiation.
Strategies for Mindful Spending:
So given this mini-lesson on psychology, I think it’s time we delve into strategies or methods that you can use to help combat things that are literally part of our human behavioral nature.
1. Practicing Self-Awareness and Reflection:
Before making a purchase, take a moment to reflect on your motives. Really decipher whether the purchase is a genuine need or a result of impulse or emotional triggers. The more self-aware you are, then the better your chances of making a conscious decision and avoiding unnecessary spending… or at least that's the hope.
2. Implementing a Cooling-Off Period:
For non-essential expenses, introduce a cooling-off period before making a purchase. Step away from the immediate temptation and give yourself time to evaluate whether the purchase is truly necessary or if it's a fleeting desire. This waiting period could be a few minutes up to a couple of hours. With this needed time, you are hopefully able to make more thoughtful decisions and avoid impulse buying.
3. Setting Personal Spending Limits and Budgeting:
Establish personal spending limits based on your financial situation and goals. I am one of those who advocates for budgets, but also struggles to maintain one!
At the same time, I fully realize that creating a realistic budget that outlines your income, expenses, and savings goals will put us all miles ahead of the financial awareness curve. By tracking your expenses and adhering to a budget, you gain better control over your finances, prioritize your spending, and avoid unnecessary debt. (Check out my post on building a budget for beginners here)
Understanding the psychology behind our spending habits empowers us to make more conscious and mindful financial decisions. By recognizing the factors influencing our behavior, implementing strategies for mindful spending, and learning from real-life examples (hopefully soon, Insha’Allah) we can regain control over our finances and achieve long-term financial well-being.
As I continue to go over more behavior + finance content, I would love to get your input as to ways you combat some of the more behavioral or even impulsive choices you make when dealing with spending, saving, or even avoiding your finances. As a bonus, let’s say you heard about a method and aren’t too sure about it, feel free to also send that over and we can review it together!
Please reach out to askmyfinancesis@gmail.com in order to submit questions and/or best practices!
Comments