Psychology of spending habits: what makes us spend money?

Have you ever found yourself wanting to spend money even though you know you really shouldn’t? Or you’ve been in a shop and found something on sale that you absolutely had to buy so you don’t miss out on the offer of a lifetime? Or maybe you’ve ended up completely blowing your budget on a night out with friends, even though you swore you wouldn’t?

We’ve all been there!

Even though we like to think of ourselves as rational, thoughtful creatures, the truth is, most of the decisions we make about money are anything but rational. We all overspend, we all ignore our budgets and we all impulse buy. In fact, the way all humans make decisions — especially the decisions we make about money — isn’t very rational at all.

Psychology of spending habits: how we make spending decisions 

Before we look at how we decide to spend money, it’s important to get a quick understanding of how our brains make decisions on a day-to-day basis.

Now, in the late 1950s, psychologists argued that every decision we ever make, whether that’s about who to marry or what coffee to order, is dictated by complete and utter rationality. And to this day, that’s how most of us think of ourselves; as careful thinkers that make all of our decisions based on reason, not emotion and certainly not laziness.

However, in the 1980s, two psychologists named Susan Fiske and Shelley Taylor claimed that we humans don’t make rational decisions at all. Instead, our brains are incredibly lazy and will always choose the decision that is the simplest and requires the least amount of effort.

In other words, we hardly ever carefully consider our actions; most of them are made by our brain on autopilot.

Why do our brains do this?

Well, we only have a finite amount of energy to use, and spending lots of time rationally processing whether you want a latte or a flat white takes energy away from other important things like spotting danger…

(This is a hangover from the days when we used to have to be constantly vigilant for sabre-toothed tigers and bears lurking in the bushes.)

In other words, everybody — including brainy people like Stephen Fry — are naturally lazy thinkers that make 90% of their decisions without really thinking them through at all. In fact, this theory, according to what Susan Fiske and Shelley Taylor said, is a good explanation for why ‘humans are often less than rational’. (That explains a lot of recent world events, doesn’t it?)

In other words, your actions are almost always decided by a set of unconscious and automatic processes our brains have picked up and developed from when we were children. It doesn’t matter if we’re talking about something of relatively little importance (like which t-shirt to buy) or a massive life-changing decision (like choosing a partner), we’re hard-wired to take cognitive shortcuts whenever we can and as often as we can to save our brain the effort.

And the same thing applies to how we spend money, too. In fact, Harvard Researcher Gerald Zaltman says in his book How Consumers Think that “when it comes to buying, 95% of our decision making takes place in the unconscious mind”.

(That means the next time you come home having had a bit of a shopping spree, you can just blame your unconscious mind. 😉)

Digging deeper into the psychology of spending habits

Now, millions of words have been written on the psychology of spending habits and how we make decisions (if you’re interested, we highly recommend reading Thinking, Fast and Slow by Daniel Kahneman. It won the Nobel Prize a few years ago, and it’s amazing), so we’re not going to bore you with every single way your brain makes spending decisions.

However, we thought we’d pick out three interesting ideas about the psychology of spending habits that go some way to answering: what makes us want to spend money?

Things that make us want to spend money #1: Delayed Reward Discounting 

Imagine this:

You’re in a shop and you see something that you really want (but don’t really need) for £30 or so. At the same time, you’re trying to save every penny you can to go on holiday in a few months time.

What do you do? Do you treat yourself today or put the money away for the holiday of a lifetime?

If you chose to treat yourself (and be honest!) then you’ve just felt the effects of the psychological phenomenon called Delayed Reward Discounting, where your brain automatically chooses smaller, more immediate rewards over larger rewards that you have to wait for.

And, interestingly, learning to fight against this phenomenon is crucial to forming good money habits. At its core, Delayed Reward Discounting is all about impulse control and making sure you make sensible — not irrational — money decisions. (More on that later.)

Things that make us want to spend money #2: Scarcity 

Imagine this: 

You’re on a holiday website shopping around and you notice that there’s only one room left at one of the hotels right near the beach. However, you haven’t finished looking at all the hotels yet, so you’re not sure whether this is the best hotel available...

What do you do? Do you keep looking around for different hotels or do you quickly book the room so you don’t miss out?

If you whipped out your card and booked the room lickety-split, you’ve just acted based on scarcity, rather than logic. And that’s perfectly natural. Our brains are hardwired to be in an almost permanent state of FOMO. (Again, this is probably a hangover from the days millennia ago when we needed to eat and sleep whenever we could.)

But be careful! Marketers and retailers are well aware that we flash the cash when things are scarce, so they often create false scarcity to urge people to spend their money! Use your knowledge of the psychology of spending habits to resist!

Things that make us want to spend money #3: Social pressure 

Imagine this: 

You’ve set yourself a budget of £20 for a night out with your friends. After spending that £20, your friends ask you to stay for another drink with them. You don’t want to spend more, but you also don’t want to miss out or be left out...

Or this: 

You’re out on a shopping trip with friends. You’ve set yourself another budget, but your friends want to stop for coffee and lunch while you’re out. Getting coffee and lunch would put you well over your budget for the day.

Do you stay for another drink or go for coffee and lunch? If you said yes, you’re not alone. Our brains are designed to help us fit in — in fact, some psychologists call this the herd instinct — and sometimes, that makes us spend more money. In fact, it’s not uncommon for us to completely overspend when we’re with other people because we naturally start to mimic their behaviour.

Isn’t that interesting?

So, are there any psychological tricks to help you stop spending money? 

There are! The psychology of spending doesn’t just help you understand why you spend, it can also stop you from spending money too!

If you’ve got 15 minutes to watch this video of behavioural economist Dan Ariely talking about the pain of paying. (It’s well worth it, promise. Dan makes everything really easy to understand.)

What Dan says is that we feel more pain — like actual pangs of psychological pain that’s similar to guilt — when we pay for things in cash compared to card. Similarly, we feel pain when we get instant notifications after we’ve spent money too.

Interestingly, we can use this guilt and pain to curb our spending habits a little.

In those three scenarios, we discussed earlier — treating yourself vs saving for a holiday, booking a room vs waiting and spending more when you’re with friends — using cash instead of card is likely to come with enough of a pang of pain to make you think twice and make a rational decision.

That pain shakes your brain from its habit of using lazy shortcuts and forces it to make a more rational decision.

That’s why so many budgeting and saving articles recommend a cash-only diet — it shakes your zombie-brain from buying things on autopilot!

However, it’s also important to remember that the psychology of money also works the other way: as Dan points out, sometimes it’s worth making a more painful decision — paying for a holiday upfront, for example — so that you get to enjoy what you’ve spent money on, rather than having it dampened by the pain of spending money in the moment. Important holidays, meals, presents, etc… would all be more enjoyable if they were paid off beforehand. 

Isn’t that fascinating? 

Is there a question you have about the psychology of spending you’d like us to cover? Let us know in the comments below!