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The Psychology of Spending

Listen to Best in Wealth Podcast Episode 214

In the article, “The Art and Science of Spending Money,” Morgan Housel talks about the psychology behind spending money. I am going to talk about the six points she made that hit home for me. Why? Because we need to understand why we are spending. 

I am a financial advisor. I want you to save money. But I also believe there needs to be a healthy balance between spending now and saving for the future. Maybe you are cutting back too much. Or you are spending too much and not saving for the future. There needs to be a healthy balance. 

To find that healthy balance, you need to understand what influences your buying decisions. Learn what influences those decisions in this episode of Best in Wealth!

Outline of This Episode

  • [1:05] Do you have kids that are in sports?
  • [3:31] The Art and Science of Spending Money
  • [5:34] How your background impacts spending
  • [8:12] People become entrapped by money
  • [10:56] The concept of frugality inertia
  • [13:54] Emotional attachment to large purchases
  • [18:06] The joy of spending diminishes as income rises 
  • [20:14] No one is impressed with your possessions as much as you are
  • [21:41] How will you approach your next purchase?

How your background impacts spending

Your family background heavily influences the way you spend money. We often handle money the way our parents did. The families with the biggest homes, fastest cars and shiniest jewelry often grew up snubbed in some way. Maybe they were made fun of for wearing old clothes. So part of their current spending is about healing wounds inflicted when they were younger (i.e. “revenge” spending). 

People become entrapped by money

George Vanderbilt spent six years building the 135,000-square-foot Biltmore Estate, which consists of 40 master bedrooms and a full-time staff of 400 people. Allegedly, George spent very little time there. Why? Living there was not practical. The house costs so much to maintain that it nearly ruined him. He sold 90% of the land to pay for tax debt and the house became a tourist attraction. 

Many people believe that spending will make them happy, even though it never will. But they keep spending more. If a purchase makes you happy and it falls into what balance looks like for you, go for it. But do not be like George Vanderbilt and be entrapped by money. 

The concept of frugality inertia

Some people listening are probably ultra-savers. I bet there are people saving 20–70% of their income. If you want to hit financial freedom as quickly as possible, more power to you. But when you spend your life being frugal, it is difficult to transition into a time of spending, i.e. retirement. 

If you never break away from that system, is that really winning? You are trapped by your frugality. This could ruin you. At some point, you get to spend your money. If you do not, where will the money go? To someone else, who will spend through it and not appreciate it?

Emotional attachment to large purchases

A few years ago, they built a Lifetime Fitness 10 minutes from our house. It looked pretty cool. So I took my family and went to the open house to check it out. I vowed we would not sign up for a membership. But when we walked in, we were awestruck. Everything was brand new. They offered free classes. They had an indoor and outdoor pool.

And we made that emotional purchase. The truth is that endorphins bring you short-term satisfaction when you make a large purchase. But a week later, you will likely find yourself dealing with buyer’s remorse. 

The joy of spending diminishes as income rises

The joy of spending diminishes as income rises because there is less sacrifice and sweat represented in the purchase. When I had my first job and saved up to buy my first stereo system, it was awesome. I felt so much joy. 

If you are successful and make a lot of money, you do not always feel joy when you spend. So what do you do? Get a good spending plan in place. My wife and I have “flex” accounts where we each have $200 we can spend every month. It used to be $20. We can save that $200 to spend on things I really want. 

No one is impressed with your possessions as much as you are

I bought my second new vehicle—that I have ever bought—last year because the SUV I had been driving was falling apart. I washed my new truck every few days. When I drove down the road, I imagined that everyone was looking at my new truck. But the truth is, no one cares but me. 

The next time you make a purchase, think about your triggers and cultivate an awareness of your spending. What influences your choices? 

Resources Mentioned

Connect With Scott Wellens

Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.