The Psychology of Spending Money and How to Save

If you cannot control your spending money, or if you would just like to understand what makes people spend more or less, then read on to find out about the psychology of money and how to control it.

A penny saved is a penny earned. We all know that and chances are most people agree. Yet, it’s likely that you have made a few disappointing financial decisions at some point in your life, be it an impulse buy, or a persistent lottery bidding thinking every dog has its day. 

It is interesting why we can easily let our spending out of control and blow the budgets instead of saving for the future. There are several psychological theories trying to explain this phenomenon as elaborated below.

 

Psychology Behind Spending

Once I decided to drink a glass of wine in a restaurant in Berlin (which I rarely do) instead of just satisfying my hunger and catching my train which was scheduled to leave in an hour. Of course, enjoying a glass of wine doesn’t fit well with situations when you are in a hurry. Hence, the bottled red soft wine sits in my apartment (together with a flavor of embarrassment) now, two months after that lunch. 

The technical term for this type of decision-making is ‘delayed reward discounting’. It means preferring small, immediate rewards (in my case, a glass of wine) over larger but delayed rewards (having additional money to spend on more necessary things later). This is one of the reasons why some people tend to overspend as opposed to others, who can better control their impulses and spending decisions.

Another trick that your mind can play ‘to get that goodie’, is to make you believe that you will miss out if you don’t buy it. In other words, ‘the scarcity theory’ tells that people feel an urgency to purchase products labeled as ‘limited offer’ or ‘only one left in stock’ with the fear of not being able to benefit while the product or service is available. It’s amazing how we sometimes spend unnecessarily based on a piece of information we do not even know whether is true or not.

But it is also possible that poor spending decisions will be based on past information such as the amount of money, time or effort spent up to the decision time. If you want a name for that, it is a ‘sunk cost fallacy’. The essence is we would be too ‘hurt’ if we let go of a certain product or service just because we have already spent considerable resources on that product. Imagine, for instance, you have bought an expensive car, used it for five years and now it is costlier than useful. However, your mind refuses to sell it at a lower price just because you spent dearly on it five years ago. Doesn’t make sense, right? But watch for it, it happens quite a lot.

Some people have a certain price range in their mind when they are shopping for a specific item – let’s say, a maximum of $50. When they finally find that product for less than the ceiling amount they are willing to pay, say $20, consumers ‘anchor’ their decisions on the initial price – $50. It may be that this initial price is unreasonably high, or the person does not need that product, to begin with. Yet, the psychology of anchoring pushes for potentially unhealthy financial decisions.

Last but not least, I suspect the most relevant psychological principle of overspending or unnecessary spending has to do with the fact that human beings are social beings meaning all of our decisions, especially financial ones, can be readily influenced by actions or the mere presence of others. You have probably heard how auctions work. More simply, with our friends (or even strangers) being around, we tend to be less rational in spending than otherwise. This ‘jumping on the bandwagon’ or ‘showing off’ psychology stems from the fact that we tie our social status to money spent – we attach too much meaning to money.

 

How Do We Save When We Need to Save?

One could walk through each of the above-discussed concepts and come up with relevant strategies for preventing irrational spending. To make the long story short, the key is to be highly aware when deciding on spending money. Being aware of what? The purpose of the transaction.

Before letting external factors such as marketing prompts, past experiences, or people around you get hold of your own decisions, stop and take a moment. Think about the need to buy that specific iPhone. Do you need it? Perhaps, you think of me as a real killjoy who is too mechanistic. After all, not all the purchases we make are because we need them. Sometimes, the purpose of spending money is to have fun for a short period, which is perfectly fine. That said, however, being aware of our financial decisions even when they are about entertaining ourselves can save us at least a feeling of regret in the future.

It goes without saying that the assumption made in this article is the readers have a limited budget and interest to save. Nonetheless, even the people with not-so-tight budgets could have great advantages by making healthy buying decisions. Living on less, after all, is good for our financial security, our health, and the planet’s health. Maybe the only losers in a world of less spending would be the corporates blinded by endless profits coming from unsustainable and unnecessary products.

Rather than spending money as if there is no tomorrow, let’s spend money so that we can have tomorrow.

 

Photo: Prostock-studio/Shutterstock

 


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