The Economic Psychology of Budget- Balanced Spending

Image by Gerd Altmann from Pixabay

Throughout my life, I have always come back to the idea that the answers you seek are usually right in front of you, perhaps even right next to you. But as people try to show off their intelligence and their problems become more complex, problem-solving becomes difficult to think of in the simplest terms. Psychology has helped solve many problems by allowing us to understand why the brain works in certain ways and these ways can be applied to both spending and saving.

Unique perspective

Our minds are being molded by the trends that shape today’s society, so much so that we have all forgotten to think in our own unique ways. A good example is a way a business uses marketing techniques to attract customers to purchase one brand over another. Marketers employ a psychological plan, often causing consumers to forget about things such as the right price, the right time to make a purchase or even the right geographical location from which to purchase it, in the hopes that they can convince a consumer that they must have a certain product.

We as individuals live our lives on a scale we must balance every day, making decisions that will shift the weight to the right or left in a way that keeps the scale balanced. Each decision may require another rebalancing or even removal of something in order to get back to balance, and always there is the as yet unknown to account for. If you are of the group whose money is not unlimited then you must be wary of your spending and budget considerations to keep your scale balanced.

As such, whether you’re rich, poor, or in-between, each individual approaches the economic psychology of balancing their personal budget from their own unique perspective, and this perspective is fed by one’s perception of the world.

Perception

In any given situation, perception is probably the most important factor for an individual. Generally, no two people share the same exact views and how they look at life itself can be extremely different from person to person. It stands to reason then that each individual will have a different way of budgeting and spending. Regardless of such individuality, I believe we can prove that the majority of the population falls into three distinct categories.

  • First, approximately 50% of the population lives in poverty, therefore, they can only afford the essentials or the bare minimum to live.
  • Second, there are those rich citizens that do not even waste their energy looking at the price tag when purchasing something.
  • Finally, we have the middle class, perhaps an average family with two kids and bills at the end of each month, a savings account meant for emergencies or perhaps paying university fees for their children, or maybe discretionary spending for a summer vacation. Occasionally, they can purchase some luxury items, but in order to do so they must give up something else and they always have their spending balance in mind.

So what is the link between perception and action? Does the behavior we manifest when making economical decisions always result in an efficient outcome? Is the same true not only for economic decisions but everyday decisions, too?

Most of the time, choices are personal, however, they can be influenced by many different factors: risk vs. reward; efficiency vs. deficiency; and using reverse psychology for saving vs. spending.

For example, you forgot about a debt owed you and suddenly the money is returned. It’s like winning a small lottery, however, you are not able to meet your wants because you must first meet your needs, but where a small minority of the population would consider putting this sum into a savings account, a greater number are tempted to spend it on desired luxuries or wants.

The world (advertiser and sellers) tells you to spend, spend, spend, and buy, buy, buy and you, yourself, want to keep up with your neighbor who just bought a new car so instead of saving your money, you buy something that is not essential to living, but that you’ve convinced yourself is essential to your well-being.

The psychological viewpoint

From a psychological vantage point, most people see the benefit of being rewarded for taking positive economic activity. For example, cooking a meal results in the double pleasure of serving something homemade and knowing you saved some money by making it yourself rather than ordering takeout.

Doing your homework will get you good grades and the sense of achievement in furtherance of your career goals while working for a living brings the financial reward of a steady paycheck. But are they really a reward if we are required to work to pay the rent, bills and living necessities? The answer is, it depends. On what, you ask? I believe your mindset sets the tone, not only for what you can achieve but for the speed, quality, and efficiency of your performance.

Much research has been done regarding the way consumers spend money and in many cases, offers, promotions, and “great deals” actually diminish the average consumer’s spending efficiency. This psychological trick of using urgency to get you to spend money by putting things on sale for a limited time or getting “two-for-one” deals to make you think you are essentially getting more goods or services for your money is time-tested and still in use because it works. And while sometimes it’s a good deal, the truth is that often, it’s just a bluff so you must do your homework.

The mission of every retail business is to get rid of its stock as fast as possible in order to bring in more stock to sell. Can we apply the mindset theory in this case? Most assuredly yes.

Retailers know how to engage their target audience so it is up to the audience to know they are being targeted and to look at their budget and whether they can afford to buy a particular product.

For example, a single mother of three children on a limited budget generally does not dare to buy luxuries because a luxury purchase is at the expense of a necessity she will no longer be able to afford and, as a single mother, she must first feed and clothe her children. A married couple with no children and a good financial position does not look at the price of certain luxuries because they know they can afford it.

The single mother has to budget as it is her only hope to afford all the necessities for her children. The couple would be only required to budget if they would desire an expensive luxury way beyond their means such as a high-end sports car or an expensive vacation. While both families have to “budget” to afford what is beyond their means, the couple that can’t afford the sports car isn’t considered to be struggling while the single mother most definitely is.

Does spending on credit affects the way we budget?

Most people have desires greater than their budget allows and credit cards have been the modern world’s way to give people what they want — more stuff. If you do not have a lot of choice as to the products you desire because of your financial position then the only way to improve your condition is buying on credit.

The relevant question to ask here is, does spending on credit affect the way we budget?

Knowing that the money you are spending is not technically yours and will have to be paid back at some point, along with interest, does this change the way we spend?

Time is a big factor in many instances as some people desire things immediately. You could wait two weeks until you are paid and purchase that new phone that you have been dreaming of or you can buy it on credit and get it now.

It is just like purchasing something online and paying extra to have it delivered by tomorrow rather than two days later. The efficiency of spending has been thrown out the window all because we need things now, which feeds the psychological desire of not having to wait so we think the extra money is worth it.

The struggle of saving

Saving money is not easy, and many variables affect this process, mainly your personal financial cash flow. You need to ask yourself a few questions to determine the “real” need for a certain product. Does your income permit you to purchase something of a higher quality or are you required to drop the quality of certain products or even not purchase it at all? How will the quality of the product affect you apart from your financial point of view? Will the lower quality product effect your health, state of mind or overall satisfaction?

Today’s society is developing in such a way that we no longer pay attention to the small things that create the bigger picture, only the immediate gratification of the little self’s desires. I believe it is time to ask what the big Self needs, not what the little self wants, and to create a budget that we can live a better life with.

Avid Writer with invaluable knowledge in Business Studies, History and Psychology. “You make your own life” atapalaga97@gmail.com

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