Spending is a way of life in the United States, but some things we spend money on are more necessary than others, and others are not necessary at all. Have you considered lately how some of your expenses made their way into the ‘necessary’ column, or evaluated the true motive behind your unnecessary spending decisions? Why do you buy things you don’t need or accumulate bills for services you were previously fine without? Behind every purchase is a motive, and if you’re interested in reigning in the expenses, getting out of a debt hole, or ratcheting up your savings (or all of the above), you would do well to check your spending behavior for the following biases.
Also a common behavior among college students working on papers, procrastination usually shows up whenever unwanted or unexpected financial decisions arise. You know, like fixing that obscure sensor on your car’s engine that lights up your dashboard but doesn’t immediately affect functionality; or, that loan you’ve been meaning to start paying more than the minimum on; or, delaying retirement planning. Punting is an effective strategy for football teams on fourth down and long, but for necessary expenditures, it is not the smartest strategy. Avoiding certain expenses in the short term could end up costing you more in the long term, and a tendency to procrastinate lies at the root of this exacerbation.
Consuming The Whole Thing
This behavioral bias creates a strong desire for an individual to consume an entire unit of something, rather than leaving some part of it unfinished (if you’ve just finished the last episode of Breaking Bad, you’ve experienced this). We tend to consume as much as we are given – the larger the unit we buy, the more of it we will consume (think Costco and Netflix when it comes to food and streaming media, respectively). Recognizing this bias is crucial if you plan to curb the behavioral pattern of spending on overabundance, and work towards cutting out the excess.
This phrase refers to the human tendency to believe that something is true simply because it has been repeated frequently or over a long period of time. The myth that buying a home is a better investment than putting money in CDs or the stock market is perpetuated, it seems, whenever the government is trying to stimulate the economy. Lower interest rates are the mantra you continually hear until you are persuaded that buying a home is truly a great deal in this market. Over the course of owning a home, however, expenses and depreciation could easily turn your investment into a net loss, which is why many personal finance experts plead with consumers not to view a house as an investment. Balancing the behavioral tendency to buy into oft-repeated advice by critically assessing your unique situation could help you make wiser choices with where you invest your money.
When you compare a premium brand product with a generic brand product and decide to purchase the former because of its superior quality, you could be making an unfair comparison. Instead of making a distinction between the two products based on how they compare to one another, evaluate each product individually on the basis of how well each would serve the end goal for which you plan to use it. When examined separately with end use in mind, the generic product will often perform its function just as well, if not better than, its more expensive premium counterpart. Acknowledging and avoiding this comparison bias could save you money on a range of other products as well, from household supplies to grad schools.
We frequently make the decision to buy something because we think it will make us feel a certain way at some point in the future. It is easy to overestimate the impact that our spending will have on the degree of delight, pleasure, and satisfaction we receive from a given expenditure. If you have ever shopped for a car or a dress, you have some concept of the behavior. The intensity and length of impact a purchase will have on intangible benefits will more likely be akin to a bottle rocket fired off by one of your neighbor’s kids. Controlling your imagination and employing some healthy pessimism, as far as expectations are concerned, is key to avoiding the broken promises (and spending habits) perpetuated by the illusion of a product’s impact on your life.
Everything Will Always Be Normal
The bias of normalcy is a big nemesis of emergency savings. This bias creates behavior that leads one to act as if a financial situation will never change or is immune to disasters and unexpected life events. This person will keep a narrower margin between expenses and income, in addition to maintaining a lack of emphasis on contingency planning. With no funds stored in reserve, heaven forbid he or she loses a job, gets sick or injured, or is forced to take on any unexpected expenses. The truth is that circumstances change all the time, and rose-colored glasses don’t offer the most realistic view of the way the world really works. Preparing your finances for life’s abnormalities is essential to avoiding an increase of debt and will give you a head start on the savings track.
Even if you refuse to peg yourself with one of these biases (and scoff at us pathological spenders), it would still be helpful to keep them in mind as you live and spend money. It is highly likely that you will begin to see a pattern emerge that closely resembles one or more of the tendencies listed above. Being honest about what you observe in this process is essential to addressing and correcting the behavioral biases that make it difficult to avoid debt and build savings.
Patrick Russo writes for DepositAccounts.com, a website that strives to make it as easy as possible to find the best bank account by tracking current interest rates and other details for thousands of banks and credit unions. It also displays thousands of bank reviews submitted by other customers and provides financial health statistics for the more than 14,000 banks and credit unions it covers.