Behavioural finance is a fascinating subject that highlights the many cultural, social, psychological and cognitive factors that determine how we interact with money. While knowing your fundamental relationship with money may not change a lot initially, it will allow you to notice your patterns. Eventually, you will figure out why you do what you do and if you want to change it. One of the first things one might notice in patterns in whether they are, at the core, spenders, savers, or somewhere in between. To understand this, let’s try and unpack what makes people spend or save in the first place.
Some people find it very difficult to spend money. They hold on to the last penny, hunt up deals and if they can avoid an expense, they will. The joy of money in their bank has a very high weight and so to spend happily, the joy of the purchase must be significantly higher. On the other hand, there are people for whom spending is the joy, and savings could be negligible, or a by-product of a life lived, and money spent.
We live in a consumer economy which means early on, so many of us are conditioned to equate success and happiness with the tangible products (houses, cars, clothes) and services (schools, holidays, etc) that are available. Hence, when we can instantly get access to these, the dopamine centres in our brain possibly light up and we feel like we achieved something. This reinforces a mindset where money becomes both a means to an end and a goal in itself. It motivates us on so many levels and can soothe (and trigger) multiple psychological elements.
At the first level, spending brings instant gratification. The loop from “I want” to “its mine” is closed quite swiftly and neatly. For many, it also soothes an emotional need in a manner similar to food. So, having a bad day, here is an easy fix – go buy something and the dopamine will lift your mood for the moment – and it can be a loop. The loop can be more easily activated when the motivation to spend comes from social pressure to buy the bag everyone has, the shoes etc. We also have so many cognitive biases and mental shortcuts like anchoring (relying heavily on initial price points) and loss aversion (fear of missing out on deals) that can lead to spending more than intended. While it can be cloaked as many different things, at its root, especially when its frequent and non-essential, spending can soothe a void very efficiently. The problem is, money is a semi-fixed good, which means that in order to get more, you must earn more. Credit card access makes us feel we have more than we do, and those cycles can be very unhealthy.
If it’s obvious that we are better off spending prudently and saving more, why don’t more of us do it? In my view, the most common reason lies in the concept of time value of money which says that “money today is worth more than money tomorrow”. What this means is that when we defer an expense today for future financial security, the value of what we gave up can feel far heavier than the relatively intangible future gain. It just makes it difficult to convince ourselves of the need and value of that saved amount. If there is financial literacy, the knowledge of what the money can earn over time can bridge the value gap. However, the basic relationship we share with money could be the primary driver of whether the saving process is easy or challenging.
So, this month, think about where you sit on the savings-spending scale and whether you are happy, guilt-free and mindful about your current position. If not, start noticing more and as you break down you smaller habits and see your patterns, you are likely to find yourself more receptive to small changes to make your spending-saving experience less driven by guilt and regret and more rewarding.
Originally written for Bahrain This Month and published here