Psychology of Spending Program Recap

Written by Andrew Dauphinee
Published on May 20, 2020

Thank you to Amanda Griffith from the Credit Union of New Jersey for looking at the underlying motivations for why we buy what we buy and how that can affect our overall financial health. Our spending habits are often grounded in psychological factors that sometimes we don’t even realize. By understanding why we spend, we can help take control over it and make better decisions to improve our financial situation.

8 Ways We Can Overspend

1. The Role of Advertising – using emotional appeals or providing product information for comparison motivates us buy or consider purchasing that product or service.
2. Keeping Up with the Joneses – we all want to have nice things and we can justify our spending habits by comparing what we have to what others (family, friends, celebrities) have in order to keep up an appearance.  Buying luxuries isn’t bad, but stay focused on what you can afford.
3. Spending Habits – We become complacent in our spending habits, even if those spending habits are no longer viable in our changing financial situation, such as buying a $5 cup of gourmet coffee every day before work instead of making our own at home.  Examine your spending to ensure they are affordable by tracking your spending (write it down, get paper receipt); oftentimes we can convince ourselves that something we want is really a need, warping our true financial situation.
4. Impulse Buying – Being impulsive is part of human nature and companies and retailers use this to their advantage, such as having shelves of candy at the cash register or having to walk the back of the store to reach the pharmacy; the more products that are in front of us as we try to get to what we want, the more likely we will impulsively buy something else.  Try creating a shopping list and sticking to it to avoid unnecessary purchases.  Also try avoiding browsing, free sample, trying on expensive clothes, or talking to salespeople who approach you unsolicited.
5. Bargain Hunting – Just because something is on sale or for a great deal does not mean that we must have that item.  While it feels great to save money, if you did not have a use for the item nor were planning on buying the item anyways, you may end up spending more money on things that you don’t really need.  Try to focus on things that you are already committed to buying or know that you will have an actual need for in the future (food, toiletries, cleaning products, etc.).
6. Retail Therapy – For some people, going out shopping, and by extension finding great deals, makes one feel better and can distract from issues or problems in one’s life.  Using shopping as a therapy or escape can quickly put us out of our budget and lead to other emotional and financial issues.  Don’t feel pressured to buy things when shopping with friends and family; if you don’t need it immediately, don’t buy it!  If you struggle with using shopping as therapy, try to find other activities that you can do in place of it or speak to medical professional to find appropriate coping mechanisms.
7. Money As Love – We all want to show our love and we commonly do that by buying things, especially things that are only temporary such as flowers or food.  While periodically spending money on the ones we love to show our commitment or appreciation is perfectly fine, using the amount of money we spend or how often we spend can easily exhaust our finances.  Acting as an ATM to family and friends can do more harm than good, especially if those people continually come to you with money problems.  If you do need to give people large amounts of money, creating an agreement to have the loan repaid.
8. I’ll Worry About Tomorrow Tomorrow – Many people tend to focus on the here and now in their purchasing habits rather than the days, months, or years in the future.  A perfect example is using credit cards or loans to buy things immediately and failing to realize that by not paying off those expenditures immediately, they will cost more in the long-term due to interest that could be better spent on things such as paying down other debt or saving for a vacation or down payment on a house.

The Role of Credit

Credit cards can often lull us into a false sense of financial security because if needed, we can always put it on a credit card.  However, credit cards are not your money!  All purchases need to be paid back within a specific amount of time (usually a month) to avoid paying interest, which can range from 15%-25%, with some even higher. For example, if you use a credit card for family dinner that cost $100 and you don’t pay it off, you could be paying $115 – $125 for that dinner because of the interest…and the food has already left your body! Credit cards can also lure us into a false sense benefits by offering incentives such as reward points or cash back. If you have to use a credit card, try to spend it on fixed monthly expenses that you know will be paid off immediately so you can still take advantage of those “rewards”.

Be a Conscious Consumer

When making any purchase, even if it is just a cup of coffee, we should really consider the following questions:

• Will I really use the product or service?
• What are my motives for making the purchase?
• Do I own anything else that provides the same use?
• Did I feel a need for this item before I saw it online or in the store?
• What are the financial and emotion costs of the purchase; can I really afford it?
• Can I get the product or service for less elsewhere?

 If after answering these questions you feel reserved, ashamed, conflicted, or any other emotion that gives you pause, rethink the purchase. Retraining our brain is a lot of work, but can have very beneficial and lost-lasting impacts that we will ultimately be grateful for.

If you have any questions or would like help in examining your finances, please contact Amanda Griffith at agriffith@cunj.org.