WOOCS 2.1.5.4

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Does Your Gross Habits Exceed Net Income

If you are reading this, I can bet you need no lecture on the art of spending. You are all acutely aware that ‘you must learn to spend less than you earn, otherwise the best stock, lottery win, and most lucrative real estate won’t do you any good!’ But why is it that many still overspend?

A research by The Co-operative suggests that, 1 in 3 people overspend by £2,660 every year and nearly a third (32%) of UK adults do not feel confident that they can pay their bills every month.  So let’s have a look at the cause of overspending…

  • Low on Emotional Gas

When you are depressed, sad or bored, you are very likely to spend more.  A lady once acknowledged ‘I tend to splash out on shoes when I’m depressed. Now, I have over 200 pair of shoes, which probably suggests that I’m depressed an awful lot.’ Whenever you are low on emotional gas, you are more likely to convince yourselves that the next purchase will make you happy. This is true for men and women alike. While women tend to splash out on fashion goods, men turn to toys and gadgets.

In a study conducted at Harvard, people were asked to watch either a sad video or a video designed to be emotionally neutral. Afterward, participants were given the opportunity to buy sporty water bottles with the $10 they received for participating. Results showed those who watched the sad video were willing to pay, on average, $2.11 for the bottle, nearly four times as much as the $0.56 that those who watched the neutral video were willing to pay.

Here’s a piece of advice, next time you catch yourself in an emotional valley, try these; listen to some good music, sing if you like, go for a run, start a conversation or read the bible. Whatever you do, don’t go shopping.

  •  Using Plastic

Believe it or not, when you use plastic, you are more likely to spend 15%- 20% more money. Studies of consumer psychology show that people who use cash are less likely to spend it frivolously or impulsively. This is due to the “pain of paying,” associated with the way we pay.  When you pay cash, you literally watch your money part from you. With credit or debit cards, the transaction is less transparent and the pain of paying is put off until a later date, generally when the credit card bill arrives or the bank account is balanced. By then, however, the purchase has long since been made.

A study by researchers from Stanford, MIT and Carnegie Mellon, which involves taking imaging scans of people’s brain as they make purchases, shows that an area in the brain responsible registering pain is magnified significantly when paying with cash, compared to using a credit/debit card. Credit cards effectively anesthetize the pain of paying,” said George Loewenstein, one of the researchers. “You swipe the card and it doesn’t feel like you’re giving anything up to make the purchase, unlike paying cash where you have to hand over bills.”

But in case you don’t believe university researchers, take a look at the real world. When McDonald’s started allowing credit card purchases, the average purchase went from $4.50 up to $7.00, a 55% increase in spending and, presumably your pants size. So for those of your who ‘play smart’ with credit card because you get a 2% cash back or air miles, you are playing a loser’s game.

  • A Sense of Entitlement

‘I work really hard, so I deserve it.’  I have heard this over and over again. It’s the classic excuse used by many to convince themselves they deserve something they can’t afford. Our media is filled with adverts telling us we deserve the latest fad and fashion! These days, it is against the law not to own an iphone or an ipad but if you choose cable TV over saving for retirement, you are ‘upmarket.’

  • Keeping Up With the Joneses

Love it or loathe it, we tend to take our spending cues from our neighbours, friends and colleagues. The area we live him tend to influence what kind of car we drive, where our children go to school and what we serve at dinner party. We tend to keep up with the Joneses.

The trouble is the Joneses are broke! They drive good cars but they in arrears on their mortgage payment. The Joneses have the latest gadgets, plasma TV, iPad etc but they have no savings for emergency and their retirement account isn’t looking good either. Rather than cut back on their lifestyle and deal with the problem, the Joneses prefer to keep up the appearance.  They are more concerned about impressing other. Will Smith was right when he observed that ‘people spend the money they don’t have, to buy the things they don’t need to impress people they don’t like’

  • Chasing ‘Bargains, Offers and Sales’

So you went down into your local Tesco and there is a 20% discount on the plasma TV and you decided to buy it! Hurry, you just saved 20%! Really? No, you have just spent 80% of money you weren’t planning on spending! Deals and bargains are ONLY worthwhile if you were planning on making the purchase anyway.

 

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