Budgeting and cashflow analysis generally identifies “what” you are spending your money on. This ensures your expenses don’t outweigh your income.
However, perhaps the question that would provide more valuable insights is: “Why do you spend?”
Trying to understand the psychology of spending, that is the triggers and motivators, is an interesting process to go through yet one that is often shied away from for fear of the result!
This is an important area of discussion with clients and there are generally 4 common reasons why people spend.
- To pay for basic needs such as food, shelter, education, clothing and health.
- To solve a problem. For many, this is lack of time and therefore we outsource jobs such as house cleaning and gardening.
- “Keeping up with the Joneses”.
- Retail therapy.
Out of the reasons above, the two that can become problematic are points 3 and 4. The notion of “Keeping up with the Joneses” is still very much alive in our world today. With products and services so accessible online, and the availability of credit, it’s easy to buy the latest of everything. The emotional need to feel acceptance from peers drives this behaviour and can often lead to people living beyond their means.
Similarly, retail therapy can be an emotional reaction to something negative that’s happened in our day or life. The “hit” of comfort that it provides can be addictive and a pattern that is easily established.
If you feel as though your financial success is far from what it should be, then it’s worth tracking your spend for a month. Note the dollar amount, type of purchase and then take the extra steps to record the time of day and how you were feeling. By asking “why” you will gain valuable insights. This can then allow more precise changes to your spending habits and in turn lead you to greater financial success.