The Psychology of Spending
It is impossible to build wealth when spending is equal to or more than your income. This may seem like common sense, yet overconsumption is a serious issue in the United States.
As of March 2017, the average individual credit card debt is $5,700 with the average household debt at $16,000. These numbers vary by state, age, income, race, and gender. Interestingly, Alaska is the state with the highest average debt at $7,700, followed by Washington, D.C. ($6,580), and Virginia ($6,520).
Debt is highest among Caucasians ($7,940) and Asians ($7,660) and individuals ages 45 to 54 years ($9,100). In terms of gender, men have more debt than women by an average difference of $2,500. As income increases, so does debt. Individuals who make more than $160,000 per year have debt averages over $11,000.
Millennial's (currently those under the age of 35), as well as, individuals over the age of 75 have the lowest debt averages. While this is encouraging, the average credit card debt for these individuals is $5700 and nationwide averages continue to rise over the years.
In our last post on the scarcity mindset, we discussed how evolution has influenced us to focus on our limited resources for survival, but what else influences us to confuse our wants versus our needs?
There are a number of factors, but ultimately the largest influence is our emotions.
Consider this scenario, you are about to go on vacation with your friends, family, or partner. You start imagining the things you will do there (dinners, site seeing, excursions, etc), feel excited, and then start thinking you need new clothes to go with these new and exciting experiences.
Unfortunately, we know this doesn't just happen right before vacations, we may feel encouraged to purchase things in various scenarios including after starting a new job, after a promotion, before a special event, after purchasing a home, or simply on weekends when we feel we have nothing to do and so shopping becomes a fun outing.
It used to be that humans preserved and maintained their belongings and purchased only the items necessary for their survival. But with the influence of social media, advertising, accessibility and cheaper options, humans today have more than they need but still feel they don't have enough.
We all have versions of an ideal self, a self that perhaps eats more vegetables, exercises daily, drinks more water, dresses more fashionably, is more organized, makes more money, has a better career, etc. These ideal versions influence us to believe that by purchasing certain items we will be one step closer to our more attractive or more successful ideal selves.
For example, how many people purchase things such as exercise gear and attire, thinking this will influence them to start exercising, and then continue to not exercise?
The largest influence, however, is the idea that these things will make us happier. And in a fleeting moment after a purchase, we feel that happiness. The feel-good neurotransmitter in our brain called dopamine increases, causing us to feel a rush of satisfaction and influencing us to want to feel it again and again.
But once the rush goes away, we are not any happier and instead may feel worse, with feelings of hopelessness, guilt, and regret.
So what can you do?
1. Become aware of this influence.
Analyze your thoughts and emotions whenever you feel you need to purchase something. (In one of our earlier posts, we included a free thought record PDF you can use).
Are you imagining how much easier, simpler or happier your life will be with this new item? Have you had these thoughts before and did it really change your life? Or did you find yourself feeling you needed something else shortly after? Is this thing related to an ideal version of yourself? Are you imagining how much smarter, more attractive or successful you will be after this purchase?
2. Delay purchasing the item for a while.
If shopping online, put it in your shopping cart but don't checkout. Wait a few days and then decide if you really need those items. If purchasing at the store, leave the tags on for a few days and then ask yourself if you really want to keep the item.
3. Determine your values.
We all have different values. Make a list of the things that are really important to you or complete a valued living questionnaire.
How is your purchase related to your values? Focus on the things you really care about instead of thinking you need it all. Individuals who are happier live a life more in line with their values.
4. Budget for splurge items.
Never allowing yourself the occasional purchase of something you don't really need is unrealistic. Completely restricting yourself doesn't work in the long-term the same way diets don't work. Eventually, you will give in and the damage at that point may be worse.
Instead, allot a certain amount of your income into these purchases for guilt-free spending. Put a certain amount into an envelope every paycheck or create sub-accounts specific for this spending. Capital One 360 has free sub-accounts that allow you to transfer a specific scheduled amount and share it with another person. You can nickname the account whatever you want and see your progress every month.