Everything comes at a price and there is an opportunity cost for all our expenditure. Every purchase you make today is a withdrawal from something you might have had in the future, and the act of purchasing involves assessing your immediate need against a future goal. Money spent on one thing now cannot be spent on something else later. The decision to purchase something that is not absolutely necessary, for instance another pair of designer sneakers, demonstrates a lack of appreciation for the opportunity cost of what that money could have done for you in the future. However, the reasons that people overspend go beyond lack of appreciation for the value of money. There are a number of psychological, emotional and practical reasons that people overspend:
- Not having a plan
Not having a plan for the future opens the sluice gates for spending in the present. It creates a situation where if you don’t know where you’re headed, then any road will do. Not being clear on your future objectives will leave you with no reason to pause for thought when faced with a purchasing decision. With no future objective to weigh the decision against, there is no way of truly evaluating the opportunity cost of a purchase. The danger of not having a plan is that you may just assume a YOLO (you only live once) approach to spending which is detrimental to your future financial security.
- Mental accounting
Mental accounting is a behavioural bias which can result it us spending money unnecessarily. In essence, mental accounting involves separating your money into different compartments without looking at the overall picture. By way of example, you have been saving up for a new pair of sunglasses which cost R2 000. When you go to purchase them, you find that they are on sale for R1 500. Through a process of mental accounting, you believe you now have an extra R500 to spend as you wish as opposed to saving the R500 for the future or using it to offset debt. In the same way, some people consider SARS tax returns to be ‘free’ money and use it to treat themselves instead of using it to reduce their debt. Offers such as ‘Buy 2 for the price of 3’ rely on consumers’ tendencies to do mental accounting to trick themselves into believing they have saved money by spending.
Special occasions such as Christmas, birthdays, Valentine’s Day and Mother’s Day provide consumers with opportunities to overspend, using the fact that it is a ‘special occasion’ as a means to justify the spend. To alleviate guilt and feelings of ‘buyer’s remorse’, many people try to rationalise their purchase by convincing themselves it was absolutely necessary. While splashing out every now and then is perfectly normal, it causes a problem if it has not been included in your budgeting.
- Present bias
Another behavioural bias that we tend to fall prey to is known as ‘present bias’. This bias causes us to over-value the immediate gain of a purchase while under-valuing the future potential of the money. Present bias may convince us to pay more for a product in return for same-day delivery, for instance, or choosing a motor plan with a large balloon payment because the monthly installments are lower. The long-term financial logic makes no sense, but the in-the-moment bias leads us to believe that we are making a good choice.
- Lack of psychological connection
As we head towards a cashless society, consumers are becoming more and more detached from money as a tangible object. Cardless cash withdrawals, tap ‘n go payments, Snapscan and online shopping have created a psychological chasm between consumers and their money. Being more physically distant from our money helps to reduce the levels of guilt we feel when we spend, and distances us from the longer-term consequences of our spending.
According to recent research conducted by PayPal and Ipsos, South Africans will spend R61 billion at online stores in 2020, with much of this spend being conveniences purchases. There are undoubtedly distinct advantages to shopping online and the benefits of true convenience shopping should not be overlooked. However, online retailers employ a number of strategies to entice consumers to buy more than initially intended which can lead to financial problems and expensive debt. Retail strategies include one-click ordering, limited stock alerts, free shipping, free returns and other ‘save-to-spend’ strategies that play on our biases.
- Instant gratification
The need for instant gratification can be driven by a number of things including, boredom, stress, unhappiness, feelings of isolation or even euphoria – and instant gratification wins when our will power is weak. What is interesting is that willpower is a resource than can be depleted over time. For instance, when on diet you might wake up with a steely resolve to resist eating unhealthy food. However, as you tire out during the course of the day, so too does your willpower – making it easier to succumb to grabbing a McDonald’s burger on the way home. When our willpower is depleted, we are far more likely to act on impulse and buy things we don’t need. Retailers understand this and use mechanisms such as loud music, scent, bright lights, appealing visuals and special offers to whittle away at our will power in the hopes that we will eventually cave in and buy.
One of the most common causes of unnecessary spending is convincing ourselves that we deserve it. The ‘shop ‘til you drop’ and ‘I feel the urge to splurge’ rhetoric unfortunately lends itself to overspending, and the justification thereof. Through a toxic mix of mood and money, many people manage to convince themselves that they deserve to be spoilt – regardless of whether they can afford it or not. ‘Retail therapy’ is used by many as a means of lifting spirits in an attempt to buy themselves out of depression, albeit temporarily. Sadly, the financial consequences of overspending only serve to perpetuate feelings of depression and anxiety as their financial situation worsens and debt mounts.
- Shopping addictions
Similar in a sense to retail therapy, shopping addiction is categorised as an impulsive-control disorder which affects around 6% of the population. Compulsive shoppers suffer from a genuine mental disorder which causes them to buy things they don’t need and often don’t even want, while at the same time putting their family’s financial futures at risk. Binge buying is an addiction similar to alcoholism or gambling and can have devastating consequences for all involved.
- Lifestyle maintenance
Social media has created more pressure than ever to keep up with the Jones’s. In a recent survey it was found that two-thirds of Brits spend money or lead a certain lifestyle as a result of social pressure, even though this prevents them from achieving financial security. 34% of those surveyed said that peer pressure to lead a certain lifestyle or to spend money to keep up with friends was a barrier to their financial security. The costs of keeping up appearances are ongoing because one constantly needs to spend money to stay ahead of trends and fashion. Lifestyle maintenance costs make it very difficult to adhere to a long-term financial plan as your financial resources are continually being tapped to buy bigger, better and faster.
In a world of infinite choice, accepting that we can have anything we want but not everything we want is a tough, but necessary, lesson to learn.
Have a great Wednesday!