The Psychology Of Spending Versus Saving

Do you ever come home from the shops, loaded up with bags, and wonder why the hell you just spent all that money on a bunch of stuff you not only didn’t need, but didn’t even want when you walked out the door that morning? Why does our brain somehow convince us to spend our hard earned, even when we’re almost certain we’re all set for earthly delights?

Let’s be honest: saving money is less fun than spending it.

While eventually paying for your sweet overseas holiday or putting down a deposit for your first home is immensely satisfying, that’s because it’s the part where you get to spend. The months and years leading up to that point are about as entertaining as watching paint dry.

Which is why it’s so tempting to just say “bugger it” and drop several hundred bucks on a sweet new phone, or spend a night out constantly saying, “Nah, it’s my round!”

So what’s the deal with spending versus savings? To find out, The Cusp spoke to Associate Professor Dr Shumi Akhtar, of the University of Sydney’s Business School, who told us spending can be a mind game – and, happily, that there’s nothing wrong with the occasional bit of retail therapy.

Shopping, by definition, is not saving

It’s perhaps the primary mind game we play with ourselves when we’re out shopping – you see a sign advertising a massive discount, and think “I’d be mad to miss savings like that”.

But spending isn’t saving.

“Especially when there’s a discount, or you go past a shop and there’s an item that has a 50 per cent reduction, that’s an attractive feature for us,” Dr Akhtar explains.

“Psychologically we think ‘50 per cent of the price I’ll be saving, I’ll go for it!’

“Whether we need it or not, that’s completely different. If you need it, then it’s worthwhile buying it, but more often than not people will buy something they don’t need, arguing, ‘but it was 50 per cent savings’.

“But they never saved it, they actually paid 50 per cent.

“It’s like saying glass half empty and half full. In this instance, they’re only looking at the half-full part, meaning you really have to spend the 50 per cent to get the so-called savings.”

There’s also a bizarre psychological contest we’re having with hypothetical people:

“People aged 18-35 will buy out of competition. Competition is more like ‘Oh, if I don’t buy it, someone else is going to get it.’ It’s a kind of jealousy. So I’m going to buy it and it’s going to be mine, and I’ll get the savings.

“But you haven’t saved anything. Shopping is spending, so it’s not savings.”

What’s the value of money compared to a purchase?

Dr Akhtar gave us an overview of the work of Princeton scholar Daniel Kahneman, who researched how people see the value of money, using the example of going to a concert.

Say, for example, someone wants to go to a show, so buys a ticket for $150. But when they arrive at the concert, they can’t find their ticket.

On the other hand, another person doesn’t buy the ticket up front, they choose to buy it at the gate of the concert. But when they arrive at the concert they realise they’ve lost the $150 they were going to use to purchase the ticket.

Now, in both scenarios, the $150 is gone. But in the second scenario, the person chooses to use a credit card to purchase the ticket and watch the concert.

The difference between the two is that in the first example, the purchase was unnecessary. If the first person really wanted to go to the concert, they would have spent the $150 again. But since they didn’t, it was clearly just an impulse buy – a friend was going, for example, and they decided to tag along. It wasn’t a necessity, and, to them, the money is ultimately more valuable than the experience.

But in the second scenario, the person recognises the value of the money was not as important as the concert.

“We’re going to spend this money for certain things and when we spend it from that ‘psychological bucket’, for the reason we said we were going to spend it, it’s okay,” Dr Akhtar explains.

“But other times, if we didn’t put aside that money for a certain expenditure, then we won’t spend it, because of the impact it has on our bank balance.”

Can I afford it versus why should I save?

If you’re not currently aiming to make a large purchase, there’s also the question of why you’d bother to save at all.

“For young people, savings are the last thing on our mind, because we just think that we’ll be in great health and happy as ever – it will keep continuing, so there’s no need to look at bank statements,” says Dr Akhtar.

“It’s more to do with ‘live the day today’, it’s the attitude of young adults.”

And that perhaps comes down to the fact that many young people have not been given the proper tools to consider the benefits of having some coin squirrelled away for a rainy day. (Luckily, the Cusp has your back – we’ve got tips on budgeting, saving, and more.)

“We don’t really do much of a near-future cost-benefit analysis. Not many of us have the knowledge of so-called budgeting – how much we earn and how much our expenditure is, it’s just a mental calculation, and every now and then we derail away from it, and that’s because it’s just human nature to spend,” Dr Akhtar says.

Shopping can be a great way to blow off steam

But while we can treat a financial blow-out like a hangover – waking up the next day full of regret, wondering how we could have been so stupid – Dr Akhtar says the occasional splurge isn’t always the worst thing you can do.

“You may have heard of ‘retail therapy’,” Dr Akhtar says.

“If you’re bored or can’t solve something, it might be quite refreshing because it doesn’t require you to think. It’s just something new, it’s distracting. Being distracted itself can be quite therapeutic, if you’re going through a lot of stress at work or home.

“To be quite frank I do it sometimes – if at work I can’t figure something out or things aren’t going the way I want them to, I just go for a shop.

“Do I buy a lot of things? Probably not, it’s a matter of just getting my mind off work.”

So there’s no need to avoid the shops at all costs, but try not to lose your head while you’re there either.

Joe Frost is a writer, editor, producer, and four-fingered cautionary tale to children. You can catch him each week on Coming Attractions or on Twitter, where he’s tweeted at least twice.