If you live in the West – say the United States or the U.K. – you know all too well the problems that people have with managing finances. The savings rate is abysmal – something like 4.8% for Americans. (It’s even less for Brits.)
Meanwhile, people in this part of the world have racked up trillions of dollars in credit card debt. In 2017, alone, Americans charged over $92 billion to their credit cards. Over 60 percent have less than $1,000 in savings.
Think the problem is about not making enough money? Think again. While American families earning less than $25,000 per year have the most trouble saving, one in three households with an annual income of $50,000-$100,000 live paycheck to paycheck. One in four making over $150,000 (!) are in the same predicament.
How can we be this bad with money? What can possibly explain such unsustainable and irrational behavior?
We might agree with the famous comment from Will Rogers that, “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
Honestly though, there is one saying that is applicable throughout this entire article: “It’s not how much money you make; it’s how much you keep.” As you will see, your income is only a (small) part of the equation. The good news is that you can change your spending habits. Later, we are going to discuss 20 ways to have more control over your finances!
First, let’s talk about the psychology of finances (and spending!)
The Psychology of Finances (and Spending!)
“Consumer behavior is the study of individuals, groups, or organization and all the activities associated with the purchase … including the consumer’s emotional, mental, and behavioral responses that precede or follow these activities.” – Wikipedia: Consumer behavior
Our subconscious mind drives our financial decision-making – this is why people have so much trouble altering their spending habits. Advertising and marketing companies make a lot of money exploiting the psychological processes that drive spending.
Can we flip the tables on these schemers? Yes! It all starts with understanding the rationale behind why we spend. With a basic understanding of consumer psychology, we can practice financial self-awareness. This powerful knowledge will assist you in recognizing and correcting bad habits you might have with your finances.
The psychology of spending can be broken down into seven parts: the psychology of advertising, of “Keeping Up with the Joneses,” of impulse buying, of “But it’s a good deal!” of consumer therapy, of loving money, and of present bias.
The psychology of advertising:
As mentioned, advertisers and marketers make a living – a handsome living – out of knowing what makes consumers buy. Consciously, we know that sports drink won’t give us phenomenal abilities – but your unconscious doesn’t. That’s advertising in a nutshell.
The psychology of “Keeping Up with the Joneses”:
There’s a reason why many six-figure earners have little to no savings – and it’s called the “appearance of success.” It isn’t enough to be highly-educated with a good job; now they need to show everyone else. The problem, of course, is that they’re sacrificing financial independence for the sake of “social approval.”
The psychology of impulse buying:
Walk into a supermarket, any supermarket, and you’ll probably see one (or all!) of the following items near the checkout counters: candy, soda, “bargain” items, magazines, and electronic accessories. Supermarkets like Wal-Mart and Target strategically place every item to increase the chance of its sale. (This is marketing psychology 101.)
The psychology of “But it’s a good deal!”:
We often use the “But, it’s a good deal!” excuse to rationalize impulsive spending. Now, buying items on sale that you truly need, or were planning to buy, is smart shopping. However, it is important to remember that there is still a cost associated with every purchase – whether or not it’s a bargain. Try to keep the cost in mind, not just the savings. When that $100 pair of shoes is a “can’t miss” 75 percent off, you’re still spending 25 bucks.
The psychology of consumer therapy:
Studies show that the reward system of the brain goes haywire when we buy things. The neurochemical dopamine, associated with feels of pleasure and excitement, spikes when we buy something on impulse. Of course, these feelings of bliss and excitement are transitory, giving way to guilt and low self-esteem.
The psychology of buying love with money:
A strange trend has developed since the advent of consumerism: the idea that money can buy or replace love. This absurd notion continues to increase, in large part to the epidemic of overwork prevalent in many developed countries. Can’t go to your son’s ballgame? Meh, just stop and get him a new mitt. Forget your anniversary? Just charge that diamond necklace to your Sapphire card.
The psychology of present bias:
Another obstacle to circumvent on the way to financial sanity: the brain’s predisposition for instant gratification. Present bias, as defined by behavioral psychologists, is “the tendency of people to give stronger weight to payoffs that are closer to the present” than in the future. Here is an excellent example of present bias in the context of behavioral economics: waiting until the last minute to save for retirement.
Ask yourself these questions to help you make better financial decisions when shopping:
- Have I given thought to purchasing this before I saw it just now?
- Is this product available for a lower price elsewhere?
- Will I feel happy about this purchase, if I were to make it, 48 hours from now?
- Is this something that I need?
- How often will I use this product or service?
- Do I have something similar, at home, that I can use?
- Do I feel calm and collected when I consider the purchase, or scattered and irrational?
20 Ways to Get Control of Your Finances
Get a jar
We’re going old school with this one. If you can, buy an old-fashioned mason jar (you can also buy a money-counting jar for like $5). Now, go on a change scouring expedition. Any loose change and dollar bills go into this jar from now on. When you have a couple of bucks extra at the end of the day, put it in the change jar. The amount doesn’t matter; the idea is to help get your brain into the habit of saving.
Track your spending
Get a pen and piece of paper and carry it around with you for a week. Jot down every penny spent (don’t forget to write it down every time). At the end of the week, tally up the numbers. Where is your money going?
Know your income
Sounds simple, right? You’d be surprised at how many people don’t know how much is going into their bank account each month. You absolutely must know this amount by heart.
Check your credit report
Millions of people have errors in their credit reports – and these errors can cost you, big time. Double- and triple-check the information on your credit report for any inaccuracy. Challenge any items that you do not recognize as legitimate. (You may need to research DIY credit repair.)
Find a good savings account
As banks become more consolidated, it becomes harder to find a savings account that offers a decent interest rate. However, there are some good ones. Ally Bank offers a 1.9% APY savings account, as does American Express.
Sign up for direct deposit
If you haven’t already, sign up for direct deposit with your employer. Besides being super convenient, having your paycheck direct deposited allows you to see your earnings and spending trends over time.
Swallow your pride and sharpen your scissors. You can save some serious dough clipping those coupons. Don’t think saving a measly 30 cents on that jar of pickles is worth the effort? Assuming that you shop for groceries once a week, cashing in just ONE 30-cent coupon each time would save you about $16 in only one year.
Automate your savings
Most employers have a direct deposit system that allows you to allocate your net pay into one or more checking and savings accounts. Automating your savings is the best way to ensure that you don’t squander it.
Cut up your credit cards
Or, just keep one to help you build and maintain your credit score. Once you get into the habit of saving a bit of your paycheck each week, you’ll find that you don’t need to whip out that credit card nearly as often.
Sell your car
Think about your car payment. Does it cause you undue stress and anxiety? Consider selling it and buying something cheaper. While you may not “look cool” (hint: nobody cares), you’ll enjoy the financial weight lifted off your shoulders.
Cut out the fees!
Fees are the devil, and boy, do they add up. Check with debit and credit card statements for any “miscellaneous fees” (ugh). Then, contact your financial institution(s) and inquire about getting them waived. If they refuse, take your business elsewhere.
Eat at home
Eating out may just be the worst money-wasting habit of all. Besides making you fatter with that processed garbage, the markup on the raw product used by restaurants and fast food joints is ridiculous. (No, not even that super-delicious steak should cost $30.)