Spending Money: Insights and Recommendations

 

Recent data from government agencies and retailer organizations indicate that U.S. consumers have continued to spend money robustly in 2024 even with inflation increasing the cost of many goods and services (a.k.a., cost-of-living creep). Not surprisingly, delinquency rates on credit cards have increased, with 8.9% of balances transitioning into delinquency during the past year according to data from the Federal Reserve Bank of New York.

I recently attended a seminar called The Psychology of Spending that delved into emotions and other factors that prompt people to spend money. Below are seven insights and recommendations:

 

Emotional Appeals- Advertising campaigns frequently appeal to people’s fears and desires. Some common examples include: a desire for good health and well-being, a desire to be loved, a desire to project a positive self-image, and a fear of physical decline and financial insecurity.

 

FOMO is Real- Whether it’s called “fear of missing out” (FOMO) or “keeping up with the Joneses,” it is human nature to compare ourselves with others. As a result, people buy things to “fit in” or appear successful. It is important to remember that “you are not what you buy.”

 

Timing is Everything- Studies have found the longer people are in a store, the more likely they are to make unplanned (impulse) purchases. Therefore, solid shopping advice is: create a shopping list, follow the list, and don’t linger in a store or mall. Also, shop alone as much as possible and avoid browsing, free samples, trying on expensive clothes, and talking to salespeople.

 

Spaving Does Not Work- A new financial term, “spaving” (i.e., the practice of spending money to save money to get a perceived deal), made headlines in 2024. Unfortunately, it is simply a trap to entice consumers to spend more (e.g., “Buy 2 - Get 1 Free”). Smart shoppers look for sales on items that they need or were already planning to buy. Otherwise, bargain hunting can be costly. The best “bargain” is actually not to buy something if you do not need it.

 

Impulse Buying is Costly- Average Americans spend $315 monthly (over $3,700 per year) on impulse purchases, which feel exciting, especially when combined with spaving (i.e., the thrill of a deal). An example is “retail therapy,” where people get a temporary “rush” by shopping to cheer themselves up. Experts recommend free mood-boosting activities (e.g., walking outdoors) instead.

 

Spending Habits Can Change- It is not easy, but it can be done. For example, research shows that people spend more when they use credit so leaving credit cards home may help. Also, waiting 24 hours for purchases over, say, $50 or $100. Another habit that I wrote about in my book, Flipping a Switch, is that deeply ingrained values of frugality are also difficult to change.

 

Hard Questions- Self-evaluation can help people analyze spending habits and emotional triggers. Good questions to ask yourself are: what do I enjoy spending money on and why?, what are my best spending habits?, and what spending habits do I want to change and how can I do it?

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.