Spending is easy and fun. It gives you an immediate hit of pleasure (the chemical dopamine). The problem is that it never lasts. That’s the difference between pleasure and happiness – happiness tends to last longer. To add to this, we know that we should curtail spending as much as possible, so we can save/invest a portion of our income. But many of us struggle to do this.
There have been many behavioural studies which reveal a few tips and tricks to help you improve your spending and savings patterns. I would like to share some of these with you.
A spending holiday?
My wife and I visited India for a holiday in October last year. We were emotionally affected by the magnitude of the poverty we saw. Inevitably, it made us reflect on our own spending habits. Whilst we both practice gratitude with disciplined regularity (we’d like to think that we don’t take our fortunate situation for granted), we felt that we could be more prudent with our spending. Consequently, we decided to go on a spending holiday for 6 months! That is, we wouldn’t buy anything (excluding gifts) that we didn’t need e.g. clothing, consumables, electronics and sadly, wine (my only spending vice!).
We are nearly 4 months into our “spending holiday” and it’s quite refreshing – the items are not missed – its just the shopping experience (dopamine) that you miss every now and then, but that quickly passes. I suspect this spending holiday will recalibrate our discretionary spending in the future.
The science of spending
Below I would like to share 11 ideas to help you better understand, manage and optimise your spending habits. These ideas have been gathered from books like Happy Money, Dollars and Sense and my own personal and professional experiences. They are listed in no particular order.
- Professor Dan Ariely coined the term “pain of paying” which essentially states that it’s a lot more painful to pay for something using cash than card (or direct debit). Research confirmed that people spend less (half!) if they use cash compared to credit card. Delaying payment after delivery of the goods (Afterpay) ironically turns out to be the most painful payment method – don’t use it! Therefore, maybe it’s a good idea for you to use cash for all discretionary spending?
- Experiences have a far greater impact on our happiness than things Research has shown that to maximise your happiness per dollar, you should spend money on experiences (holidays and doing things) rather than things (clothing, electronics, etc.). Therefore, if you need to reduce your spending, reduce spending on “things” before you reduce spending on experiences.
- If you are going to allocate yourself a weekly discretionary spending budget (it’s a good idea), it is best to start the week on a Monday. Research found that people that started on a Friday tended to spend their entire weekly budget over the weekend and therefore found it hard to stick to the budget during the working week.
- Research confirms that paying for a holiday a few months in advance significantly increases your enjoyment of that holiday. Firstly, once you have paid for it, you will naturally think about it more and secondly, you have reduced the ‘pain of paying’ once you are on the holiday. Practical tips: make sure you have travel insurance if you are going to prepay.
- If you are spending too much on discretionary items, you will probably find it a lot less painful to trim 20 expenditure items by 5% each rather than eliminate one item by 100%. Don’t deny yourself in totality as its painful! Much like a “cheat day” for a diet, you must allow yourself to continue to enjoy the things you love. Just reduce the cost per item/experience or do it less frequently.
- Reward yourself regularly. Research tells us that if you do, you will be a more successful saver/investor. The rewards don’t have to be expensive (obviously), just something you love/enjoy and will look forward to. The more regular the reward (say monthly or quarterly), the more effectual they will be. Therefore, if you set yourself a spending/savings goal, attach a reward to it. Make sure the goal is attainable and realistic. Start small and then stretch the goal each consecutive period. Changing spending habits tends to take a bit of time – few people can go cold turkey.
- Delay discretionary spending by 2 weeks. You know how it goes; you are out shopping, see something that takes your fancy, you buy it, take it home and its never seen again (i.e. sits in the cupboard and is never used). Wastage! You can avoid this by committing to a ‘2-week rule’. If you see something you like, write it down. If in 2 weeks you still want to buy the item, buy it (using cash not card?). This rule will help curtail impulsive spending and its less painful because you are not saying “no”, just “not yet”.
- Maybe you only need to budget/track a handful of items? Personally, 95% of my discretionary spending is made on two items being eating out and wine. Therefore, for me to rein in my spending, I only have to track/budget for these two items. Budgeting doesn’t have to be an overwhelming project that absorbs a lot of time and energy.
- Research suggests that humans get more excited about the future than the past. Therefore, plan your purchases. If your goal is to buy a new handbag or special bottle of wine this year, plan it i.e. set a future date when you will buy it. Research your purchase. You’ll spend more time thinking about the item and maximise your “enjoyment per dollar”.
- Money spent on creating more time for you to participate in enjoyable activities/pastimes will give you more enjoyment than things. For example, spend less money on clothing and get a housekeeper – so you can spend more time with friends instead of cleaning.
- Finally, spending money on other people (loved ones or charity) gives you the most amount of enjoyment according to research. As Tony Robbins says, “living is about giving”.
More cash flow management strategies and tips can be found in my previous blog here.
I read a comment by someone (can’t recall who) a few years ago that has stuck in my head; “the more you give humans, the more they tend to complain”. We have a lot more of everything compared to people in second and third world countries. Yet it seems we have endless things to complain about. I can’t help thinking that the endless accumulation of “stuff” is partly to blame for this. I’m not a hippy by any stretch of the imagination but perhaps a simpler life (less stuff) might result in a happier life?
I hope these tips help you to better manage your cash flow. If you need help, reach out to us as we will soon launch a new service to help people track, manage and optimise their cash flow. You can register your interest with us.
