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Understand the Psychology of Spending and Overcome it

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The following is a guest post by Tina Roth. She advises about developing positive habits to help you live a rich and financial secure life. Her finance blog was created to inspire people to explore more on frugal living and especially, to help you craft a financial secure life.

Earlier, mistakes were just mistakes. But after the discovery of the subconscious mind, some mistakes came to know as Freudian slips. We commit those mistakes because the subconscious mind compels us, and the conscious mind couldn't recognize the compulsion.

Psychoanalysts believe such compulsions are behind habits. Many habits including the habit of spending are the results of psychological impulses. The era of globalization has taught us to identify ourselves as consumers, so impulsive spending appears justified.

Habitual spending

But spending out of impulse is financially disastrous. In this article, I discuss the psychological factors that trigger spending, and how to make peace with them.

Imaginary competition

We feel we need to compete with others when we don’t. Imagine your neighbor has bought a Land Rover recently. When you see him driving his new car, a subconscious impulse of competition will kick in. You’ll probably end up buying the latest model of Chrysler.

Big brands are responsible for this. Through advertisement, they create this false sense of competition, so their products get sold. And we end up buying stuff that we either don’t necessarily need or already have the inexpensive replacement. If you could resist advertisement, and ignore others, who show off, your personal finance will stay safe.

Discount offers

It’s a sales hack that forces someone to buy. Behavioral psychologists hold when we see sales pitches like “Save 60%” or “Offered at 50% Discount”, the psychological impulse to buy the so called discounted product triggers. The product that you are buying may not be coming with a discount at all.

How can you get over this impulse?

You need to keep two things in mind. Firstly, the discount may be fake. If a retailer is selling something to you at a price of $200 and claiming to offer you a 50% discount, then the original price of the item is $400. Are other retailers selling the same item at $400? If not, then it was a phony discount only to lure you. Besides, Getting a product at a discounted rate doesn't mean you are getting it free. You are still spending money. Is the item worth spending buying?

Spending out of boredom

You might find it hard to believe, but it’s true. A lot of people spend money because they are too bored to do other things. This segment of consumers mostly includes females. As a matter of fact, some psychotherapeutic techniques use shopping to alleviate stress.

The best way to overcome spending out of boredom is to do something else instead of shopping when bored or stressed out. Watch movies on Netflix, play with your kids, listen to music. Spending money when you are bored may give you a pleasant experience, but hurts your finances.

Credit cards

Some people attempt to justify spending saying it's an investment. But that's always true. One example such example is having an extra credit card.

Some might argue that having more credit cards help to increase the credit score. Well, that’s only partially true. Having more than one card doesn’t increase the score alone. The cardholder needs to keep the credit utilization ratio low, which is possible only if he spends only 10% of the credit limit.

Very few people keep their cards under-utilized, rather they spend money lavishly, which increases their debts and hurt their finances.

Instant gains

A survey was done by a group of psychologists. They gave the surveyees two choices. The surveyees could either receive $50 instantly or wait for a year and then receive $200. Most surveyees went with the former option. This has made the surveyors conclude instant gratification is a basic tendency.

Putting a leash on the desires for instant gains is necessary. Or else, one would spend money for frivolous purposes and ignore serious ones. For example, investing in health insurance or life insurance can bring substantial gains in the foreseeable future. But due to the urge for instant gratification, one might spend the money for a trivial purpose.

Budgeting skills

Budgeting may appear like an uncomplicated and simple task, but it can be daunting at times, especially if you don’t know how to budget. Budgeting can make you a prudent and frugal person, who knows his finances, and spend only when it’s necessary to spend.

Shopaholics are known to overspend. The majority of them are either in their 20s or 30s. This is the time in one’s life when he should learn to manage and understand money. Budgeting skills help you to manage your money better. As you create two tabs, one for earning and another for spending, you get to see from which areas, money is coming and how it is flowing out.

You’ll eventually want to stop the outflow and increase the inflow. This drive will replace the urge to spend and turn you into a saver from a spender. Budgeting in your 30s and 40s is very important because this is the time when people earn, try to save and fail.

What do you think of the article? Do you understand the psychology behind spending? Would you follow the tips given here to overcome impulse spending?

Last updated on April 11, 2016.

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