Why We Spend Money We Should Be Saving—and How to Resist the Impulse

With the holidays behind us, it’s a good time to explore why we spend money. Heading into year-end, the stock markets were plummeting, wiping out most, if not all, 2018 gains from our equity-based savings accounts. Yet when I walked into my groovy neighborhood gift shop to buy a holiday hostess present, people were lined up for their Curio Spice Aegean Sea salt and Somerville greeting cards for $4.50 a pop. What gives?

Research indicates that the savings rate among people with disposable income is around 6 percent. Although it’s lower than the peak in the 1960s of around 10.4 percent, it’s still a pretty good figure. Yet CNBC reports that one in three Americans has less than $5,000 saved for retirement. This suggests that when there is extra money, many think of it as spending money, not money they should save for an emergency—even though that’s exactly what most ought to be doing.

So why don’t buying patterns square with financial preparedness? I hear someone out there arguing that the cost of health care, housing, education, and the like has outpaced Americans’ incomes, and, yes, that has something to do with it, but it doesn’t tell the whole story behind why we spend money.

We can be our own worst enemy when it comes to making decisions about spending and saving. Behavioral scientists are telling us now that buying decisions, particularly on discretionary items, are more emotional than logical.

Dr. Shahram Heshmat, PhD, argues in a Psychology Today post that consumers generally act against their own best interests, and the reasons are at the core of behavioral finance. According to Dr. Heshmat, consumers are constantly bombarded by stimuli, which can include the following:

1. The call to act: One need only look at the strategies that retail behemoth Amazon employs to understand the impulse to act. (Can you say “one-click shopping”?) How about if those shoes aren’t quite right? Scroll down and see 12 similar options. As an antidote, Heshmat suggests that consumers consciously resist the impulse to buy the minute they see something they like. Use the wish list function at Amazon, rather than the one-click option.
2. Cues: Many of my jaded, sophisticated friends have told me they are immune to advertising. They are the same people who only use Tide for their wash, buy only Starbucks coffee, and are Toyota loyalists. A famous study illustrated peoples’ wine-buying habits are affected by music in the liquor store: When German opera was playing, people bought more German wine; when French music played, people bought more French wine. Chances are, you buy what you’re most exposed to.
3. Peer pressure: This is also called “herding” in behavioral economics, or the desire to conform to what everyone else is doing. How many of your clients who invest in stocks have told you they don’t want Apple, Google, Facebook, or Netflix in their portfolio?
4. Mental fatigue: Weight Watchers, through extensive study of eating habits, knows that your low points of the day are when you make bad food choices. This extends to buying decisions.
5. Loss aversion: The common application for loss aversion refers to the investor’s emotional pain over a stock loss, which far outweighs the euphoria about a stock gain. For holiday buyers, the feeling of loss associated with missing out on Black Friday deals is far stronger than the feeling of gain in keeping their money in their pocket.
6. Anchoring: Consumers have an idea of what a good deal is, usually derived from the salesperson. They will cling to that price as the justification for the purchase.

These, of course, are just some of the traps related to holiday and impulse buying. Others include “Lay Away,” “Sunk Cost Fallacy,” and a perennial favorite, “Advanced Rationalization.”

Whoever said there is free will must not have studied behavioral finance.

The good news, according to the experts, is that for every emotional buying slip, there is an antidote, and as financial advisors, we can help our clients resist the temptation to pay others before themselves.

Train your clients to browse rather than act. Make sure they understand that they are being manipulated by psychological impulses when situational cues proliferate and suggest they buy only when they are “fresh.” Simply put, be aware, and let the moment of “having to have it” pass. The following practices could make the difference between spending too much and saving enough:

1. Tell clients to leave their wallets in the car when shopping for unnecessary items. That way, if they find something they want, the inconvenience of going back out to the car will likely be enough to deter them—or at least help them decide if it’s really worth it.
2. As old school as it gets, clients could start paying with cash instead of credit cards. A credit card makes it painless—a quick swipe and no difference to you unless you view your bank account later. With cash, the money is tangible. Watching it disappear into the cash register hurts a little more than a drive-by swipe.
3. Have clients practice exercising control. Tell them to see how little they can spend while still enjoying life. This will help them learn to spend less without cutting out all fun entirely and show them the expenses they could live without.
4. Teach clients not to fall for marketing traps—whether it’s a shop-now-pay-later scheme, a buy-one-get-one-free offer, or a limited-time deal. Have them slow down, do their research, and mull over a purchase for a couple of days before making a decision.

Our clients can’t go through life abstaining from every discretionary purchase—nor should they. At the same time, the disconnect between spending patterns and savings habits is undeniable. By educating your clients on the behavioral manipulation they are exposed to on a daily basis and urging them to be more self-aware, you’ll put them on the road to making more balanced decisions that can help improve their financial situation.

What other reasons are behind why we spend money? Have you been successful in getting your clients to resist the impulse to spend when it’s not in their best interest? Please share your experiences below!