I was recently hanging out with my sister, talking about money (as I love to do) and I asked her if there were any topics on the subject of personal finance that she’d be interested in learning more about. Her response is the title to this blog – “Why do I spend more when I have less?”
It’s a great question and one I think we can all relate to. Personally, I remember very clearly being in college and running out to blow my earnings on dinners with friends the moment my paycheck would come in.
While tradition would lend us to believe that this is impulsive irresponsibility, science has something else to tell us about why we spend more when we have less.
None of Us Are Rational Creatures
We’d all like to think that we make decisions based on cold hard facts, but that’s just not the case. Economists understand this and that’s where the practice of behavioral economics has been developed. Traditional economics would have you believe that as your bank account depletes your spending behaviors become more conservative.
Behavioral economics tells us there are a variety of factors that come into play, none of them rational, but all of them human. So why do we spend more when we have less? And more importantly, what can be done to trick our brains out of falling into the traps they create for us?
Spending is the New Cocaine
Ahh dopamine, this is one of the primary chemicals in our brain that makes us feel good. Dopamine is triggered by rewards. When we buy something new we process it as a reward and dopamine floods our brains and makes us feel warm and tingly.
Dopamine is also the same chemical that’s triggered by cocaine. The same drive to feel good that caused clubgoers in the eighties to shovel powder up their noses also drives us to purchase a bunch of crap we don’t need.
This dynamic is especially true when it comes to moments in our lives when we’re experiencing stress. And what’s more stressful than feeling like you don’t have enough?
This leads me to the next dynamic that causes us to spend money we don’t have…
Scarcity Based Thinking
We humans are programmed to fear scarcity. Think of us, out there in the wild, winter is coming… our drive to hoard food to keep us safe through the months of slim pickings is a natural instinct meant to keep us safe. Another example was the beginning of the pandemic when people bought more toilet paper and bottled water than they could use in a year. Having things gives us a sense of security that is built into our animal instincts.
Traditional economics would have you think that scarcity would inspire each of us to save. To hang on to our limited resources with as much force as possible. Those people exist, they would rather freeze than have their heating bill go up a few dollars. This blog post isn’t for them.
This blog post is about people who feel scarcity of buying power when their bank accounts are depleted. We rush out to hoard up all the joy and rewards possible to enjoy those dopamine hits while we can. It’s grabbing on to as much as possible to hang on to since we can feel that winter is coming and we won’t have access for much longer.
There are also psychological effects that come into play once our brains sense scarcity. We are programmed to have tunnel vision during times of scarcity. We focus only on the unmet need, to the detriment of all of our other decision-making needs. That’s why it’s so hard to focus on prioritizing long-term goals when your brain is running on scarcity – it only sees the trees, not the forest.
In effect, we lose our ability to rationally make decisions when we are already living in a world of…
WE. MAKE. SO. MANY. DECISIONS. EVERYDAY. I think it can be hard to realize how exhausting this process is when you’ve always lived in it. It’s like trying to explain water to a fish.
I was lucky enough to spend two years of my life living in rural Paraguay. There are very few decisions to make when there isn’t much on hand. I didn’t really need to think about what to wear or cook – life made those decisions for me. Beet season.. cool, beets for dinner. It’s cold? cool, I only have one jacket.
I have a very visceral memory of coming back to the states and standing in the pen aisle at Target. In Paraguay, when I wanted to buy a pen, I had two options – blue or black. In the US, I felt like suddenly I needed to be a pen expert in order to decide. Felt tip? Ballpoint? Gel? How am I supposed to know!? I just wanted something that would write. It was exhausting. Now, 10 years later I have become numb to that feeling yet again. But it still exists.
When we’re in a state of decision fatigue we fall back on our default modes. In one study, researchers looked at loan approval rates by time of day. They found that credit officers were much less likely to approve a loan right before lunch and right before checking out for the day. Their default was “no” and at those times of day, they were experiencing decision fatigue.
This is what happens when we go shopping after work or in moments of stress. Our brains have checked out, they’ve been busy making tons of decisions and don’t want to process them anymore. We go into default mode, and for many of us, the default is chasing those dopamine hits for the rewards we are buying for ourselves.
How to hack your brain
Luckily, there are ways to work around the dynamics of your internal rewards system, scarcity thinking, and decision fatigue. Here are a few recommendations to hack your brain’s natural state of being.
First, diminish rewards by increasing pain. No, I’m not a sadist, this is actually science. The pain of paying is the terminology used by behavioral economists. This is the discomfort we experience when we have to fork over the cash. In today’s world, we use cards, which are designed to de-couple our brains from that pain. You don’t really think about individual purchases, just the account totals (or lack thereof).
It’s possible to remove the reward of the purchase by either:
- Looking at your account totals before any purchase
- Setting up automatic account total updates by text
- And setting up purchase alerts by text
As soon as you look at the actual numbers, it cuts that dopamine hit, or the expectation of the dopamine hit and brings you back to reality.
Second, shift your focus from what you don’t have, to what your goals are. Give your savings a name – “Trip to Italy”, “House Down Payment” or “FU Money” as examples. This might seem a bit silly, but it gives you something you can look at regularly to remind you of what you really want, not just whatever is immediately in front of you.
Reminding yourself of the long term can pull your brain out of tunnel vision and refocus it on what’s important. It can also start training your brain to experience saving as a rewards mechanism. Every time money hits that account you’re that much close to your goals.
And finally, limit the decisions you have to make throughout the day. There’s a reason that Steve Jobs always wore a black turtleneck – it allowed him to spend that decision-making power on more important things.
There are a variety of ways you can do this, but mainly it comes down to building systems into your life. Decide on Sunday what you’re going to eat and wear all week so you don’t have to think about it. Avoid even going into big box stores like Target, try a local mom and pop or an eCommerce site. Turn off notifications on your phone for non-essentials so you’re not trying to decide how to respond to texts or “how do I meet hot local singles???”.
We are designed to be creatures who function in the wild. Not in the society we have designed for ourselves. One of the many effects of this is that we often spend more when we have less. However, you can trick your brain out of the dynamics it creates for you.
Have other ideas on how to hack your brain so you don’t spend more when you have less? I’d love to hear about them, comment below!