How the Psychology of Spending Affects Your Budget

When most people think about financial education, they think about the basics: Budgeting, saving, and decreasing debt. While those are good topics, there is a common foundation between all of them which is often ignored.

To better manage our budgets, decrease debt and get control of our credit card spending, it’s best we understand our habits and start building new behaviors to overcome our roadblocks. Getting to that core is part of the psychology of spending.

What is the Psychology of Spending?

Psychologists have found that there are several forces that govern our consumer behavior and cause us to make decisions that are not necessarily rational or in our best interest. These external factors that go beyond cold rational calculations and play on our emotions are a major part of the psychology of spending.

Why is this important? When we spend outside of our budget based on those external factors, many people put purchases on credit cards. If you are unable to pay off your balance each month, you could wind up with debt that takes years to pay off and costs thousands of dollars in interest charges. And even without debt, unnecessary spending can take away from important saving goals, like a down payment for a house, college, or retirement.

What External Factors Play into the Psychology of Spending?

You may not realize there are several external factors that play into your spending habits. From slick advertising to the temptation of retail therapy, here are three factors that can have a serious influence over you.

The Role of Advertising

Advertisements have one main goal: Convince you to buy something. They do this by playing on your emotions, like happiness, nostalgia, sadness, anger, or fear. Some of the ways advertising plays on you include:

• Awareness boost: Seeing an ad for something new can pique your curiosity and lead you to try it, disrupting your usual spending habits.
• Desire creation: The emotional appeal of advertising can create desires for products or services that you may not have previously considered necessary, leading you to spend money on them with the hopes of achieving the advertised outcomes.
• Brand preference: When faced with a decision between multiple options, you’re more likely to choose the brand that you recognize and feel positively about due to its advertising efforts, even if it isn’t the most cost effective.

Keeping Up with the Influencers

We live in a society that judges us by our appearances. This includes what we wear, what we drive, and where we live. Because of this, many people buy things to appear well off or fit in with others around them who are in different financial situations. We call this keeping up with the influencers.

In a social media dominated world, it’s important to stick to your own financial plan and not be influenced by others around you. That’s not to say you can’t buy anything nice for yourself but make sure it’s within your spending plan or save up to buy it.

Impulse Buying and Retail Therapy

Impulse buying is something we’re all guilty of – and it’s actually very normal. Americans impulsively spend an average of $150 every month. That adds up to an extra $1,800 spent every year and about $108,000 in a lifetime.

And then there’s those times when we need a “pick me up,” and find it at our favorite stores. Just thinking about spending with abandon can feel good, right? That’s the power of retail therapy.

The issue with impulse buying and retail therapy is it’s a temporary replacement that could have lasting impact. Whatever emotion you’re trying to escape will likely return after you’re done shopping. In these situations, it’s best to find an alternative to retail therapy. Find another mood boosting activity such as exercise, reading a book, or talking to a friend.

How Do I Change My Mindset from Spending to Saving?

By being more aware of where your money is going, you can be better informed and more in tune with your spending and budget. To help change your mindset from spending to saving, ask yourself these four questions before making an unplanned purchase:

• Will I really use this product or service?
• What are my motives for making this purchase?
• What are the financial and emotional costs of this purchase?
• Can I afford this purchase?

For an even deeper understanding on the psychology of spending, be sure to view our webinar recording, hosted by SESLOC’s Education Outreach Manager Vincent Delgado.