While this sounds a really simple question, the answer isn’t as straight forward as we might think.
This simple question actually has two parts to it.
The first is why are we spending money and the second is what makes it so easy. So, let’s look at these two components in isolation and then we’ll put them back together.
The first question: Why do we spend money?
Unless you want to be a self-sufficient hermit you will be spending money! Basic everyday needs like the roof over our heads, clothing and food have a cost. So, you do need money to meet these baseline needs.
It is what happens after those needs are met, that make this a really interesting question.
The frugalists would argue that above those baseline needs we don’t need to spend very much money; the basics of life are fine. If that is how you see life, then great and if it works for you, keep doing it.
But I am guessing that, like most of us, you would like a few nice things in life that money enables us to have. Perhaps a newer model car, a well-stocked pantry, a holiday with the kids, new technology toys and anything else you fancy.
Money is emotional
“If you can’t control your emotions, you can’t control your money” – Warren Buffett
Emotional triggers are one of the primary drivers that are responsible for us spending money. It could be anger, sadness, revenge, happiness or any of a myriad of emotions that have us swiping the plastic.
It doesn’t have to be on ‘material things’, it may be on experiences like a night out at a show or a trip.
The first thing you need to check in on is your emotional state. How do you feel? If your emotions are heightened, you will likely spend more money than you normally would.
This is because your emotions have taken over, so, it will take a bit longer for your rational side to kick in. Our emotions get in the way and override our normally logical self and because we’re human, these emotions cause us to attach meaning to money.
Logic causes people to think, but it’s our emotions that prompt us to act.
For example, if money means status to you. When buying a new car, your emotions are thinking about how cool you will look or how envious your friends will be.
Your logical brain on the other hand will be saying, “but the five year old model will still get us from point A to B just as well.” Who is going to win, emotions or logic?
We are susceptible to a whole range of mental biases and the stories that we wrap around them. The scary thing is, quite often we aren’t aware these biases have kicked in. But marketers are and they use this knowledge to help us spend.
What are some of these biases?
We see money differently depending on it’s source. If we are given money, or get an unexpected windfall, we are more likely to spend it on anything we want without giving it much thought. With our salaries, however, we tend to allocate it to various categories (this is called mental accounting) and be quite clear on how we need to allocate it.
Spending justification is a form of self-deception. It allows us to spend money (whether we can afford it or not), and make it okay. It goes a bit like this: “Well, we only spent $80 on dinner last week, so we can afford $400 to go away for the weekend.”
Spending rationalisation goes hand in hand with justification. You have spent the $400 going away for the weekend and afterwards you tell yourself, “We work so hard, we really deserved that break.”
“No problem, we’ll put it on the credit card. If we pay an extra $20 a week on the credit card we will pay it off in 4 months.” You conveniently forget the interest, of course.
When you find yourself having these types of conversations, it is time to stop, step back and take time to let the rational thinking take control.
We get Anchored! We latch onto a fact or an idea and we use that as a reference point for future decisions. This is why we are so good at buying things on sale. We have seen the full retail price and then, we get a discount that is just too good to turn down. We buy and then tell ourselves how well we did and how much money we have ‘saved’.
Another example: the shop has three different versions of the same item and you pick the mid-price one thinking you are getting the best deal.
Keeping up with the Joneses
We don’t want to be seen as not being able to have what our peer group has, so we spend money to keep up.
Be very careful of this one. Keeping up with the Joneses can send you broke and guess what: it could be that the Joneses are already broke…
Or as we like to call it, a Freddy Mercury moment; “I want it all and I want it now!” We don’t like saving up and waiting to buy things when we have the money. We want it now and we can have it now because of credit.
Which leads very nicely into the second part: why it is so easy to spend money.
This piece of plastic has completely changed the way we are spending money. There has always been ways of obtaining credit. But the advent of credit cards as we now know them created a big shift in how we think and act with our money.
Before credit cards we used cash. We walked into a shop and we handed over our hard-earned cash and got something in exchange. The pain of paying occurred at the same time as the pleasure of buying. So, we tended to give a lot more thought to what we were spending our money on.
Now we hand over a credit card and we don’t have the same feeling of pain. That is delayed until the credit card statement arrives and if you don’t look at it, you can defer the pain out even further.
But you get the pleasure straight away and it feels good to spend.
The ease of ‘buy now pay later’ deals means we can buy larger items for absolutely $0, zero, nix, zip, nothing! You get the enjoyment of having the item right now and don’t have to feel the pain for months.
Spending money is so easy that we succumb – and worry about paying for it later.
We have given you just a taste of the reasons why we find it so easy to spend money. These are very generalised reasons. If you want to dig a little more deeply into your own personal reasons why you spend money, go to our Home page and take the Money Personality quiz.
If you are serious about discovering ways to mange money so you can reach your financial goals, then drop us an email or click on this link to find a day and time that suits you to have a chat with us. Best of all – it’s free!