The Psychology of Spending: How Emotions Impact Financial Decisions

Baby Boomers, most of whom were raised by parents who lived through the Great Depression, likely remember how their elders had a habit of saving things: rubber bands, grocery bags, peanut butter or jelly jars, and other household items. Similarly, persons who grew up amid food insecurity can often be observed “stocking up” on things they don’t really need, like case after case of canned vegetables or 2-liter bottles of soft drinks bought “on sale,” then kept until they are no longer fit for consumption.

The fact is, certain financial behaviors, like impulse purchasing, “retail therapy,” hoarding, and others occur because of psychological impulses that are deeply embedded due to life experiences or even trauma. There is an entire field of study, called behavioral finance, that examines these impulses in an effort to help investors and others better understand their inclinations around money and finance. This matters, because when these inclinations and impulses go unrecognized and unquestioned, they can lead to behaviors that undermine important financial goals.

The Psychology of Spending and “Money Mindset”

We all know that some people are innately savers, while others are spenders. In fact, this contrast is often seen in marriages; one partner gets a legitimate dopamine hit when making a bank deposit, the latter gets the same spark when scoring a coveted item on sale. This doesn’t mean that either orientation is bad; it just means that the two different behaviors need to be understood, acknowledged, and guarded by reasonable boundaries and expectations.

The same is true for investing: sometimes, a “herd mentality,” when everyone seems to be running for the nearest exit, can cause an emotion-led impulse to “sell everything,” even when that wouldn’t be beneficial for reaching long-term goals (spoiler alert: it is rarely beneficial). Other times, fear of missing out, or “FOMO,” causes an investor to sink too much money in the next “sure thing,” ramping up excessive risk in a single asset and undermining the wisdom of diversification and patience. Such emotional investing behaviors are rarely in the investor’s best interest for the long term.

Emotional Connection to Spending Habits

The chief challenge to achieving financial well-being for most Americans is too much debt—particularly, unsecured consumer debt, most of which is accumulated through the use of credit cards. In the absence of the type of financial mindfulness that recognizes the realities behind credit card debt (accumulating interest charges, constraints on cash flow for other purposes, etc.), credit card use can often lead to undisciplined spending habits that cripple efforts to achieve financial security.

Credit card use, in fact, often reveals an important principle about the psychology of spending: uncoupling the joy of acquisition from the discomfort of paying for it. Several years ago, an MIT finance professor conducted an experiment to study the psychology behind credit card use. He told students that they would have the opportunity to bid on tickets to a sold-out NBA game at an upcoming silent auction. Half of the students were told that they could only use cash to pay for the tickets if they won the bid; the other half were told they could use credit cards. The results were overwhelming: students with access to credit cards bid more than double for the tickets when compared to the students who could only use cash. Because the credit card purchase would be paid back “someday” instead of at the time of acquisition, its emotional consequences were deeply discounted—by fifty cents on the dollar, in this case.

What Is Financial Mindfulness?

The term “mindfulness” is trending these days. It refers to the practice of making ourselves more conscious of where we are, what we are doing, how we are feeling, and what is motivating our actions and intentions. Sometimes referred to as being “fully present,” mindfulness practice often includes behaviors like meditation, breathing exercises, and other activities that promote contemplation, stillness, and awareness of surroundings.

In that same context, financial mindfulness can be a helpful safeguard against the types of money and spending behaviors that undermine financial wellbeing. By making ourselves aware of our spending impulses and other emotion-led financial behaviors, we can build a financial life that is more purposeful, strategic, and conducive to long-term financial security.

Consider the following “exercises” that can help build financial mindfulness into your daily routine:

• “De-automate” your spending. Instead of allowing your web browser to automatically save credit card numbers, disconnect them. Delaying your ability to just hit the “buy” button can give you a chance to really think about what you’re buying and why you’re buying it.
• Your “buying journal.” The next time you feel the urge to go shopping or order something online (especially if unrelated to an actual need, event, or other circumstance), open your smart phone and dictate a voice message to yourself. Record how you are feeling at that moment, anything that is bothering you, any sources of stress, or other emotions that may be stimulating your urge for “retail therapy.” Collect these memos in a file and refer to them periodically. This can help you become more aware of the triggers that are leading you toward less productive spending.
• The 24-hour rule. Impose a 24-hour “cooling-off period” on any non-essential purchases over a certain amount (say, $50 or $100). This will allow the dopamine rush to pass and give you a chance to consider the purchase more rationally.
• Going “cash-only.” Taking a hint from the students in the MIT study, try a self-imposed moratorium on credit card use. Train yourself to use only a debit card for a month, then gradually extend your usage as far as possible to all your purchases. Knowing that you are spending only cash on hand will often create more discipline around your buying behavior.

At Aspen Wealth Management, we know the importance of healthy financial attitudes and practices. If you need a “money coach” to help get your finances in top shape, we can help.

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