Last year someone called me to explain his financial woes. All the time he was talking, I was staring at his coffee maker. It was a $3200 Espresso machine from Hammacher Schlemmer. I should also mention his Manolo Blahnik shoes. And his Uomo tie. Still, I refrained from ramming his coffee maker down his throat, and received an enlightening lesson: our brains are hard-wired to put us in debt. Read on to find out how.
1. Retail Therapy
Shopping releases chemicals in the brain, like dopamine. Apart from making us feel good, it also distracts us from existing worries. If there wasn’t a bill involved, suicide prevention lines would all route straight to Orchard Central. Unfortunately, there is a bill. And the more depressed you get, the more you’ll spend. Shopping really is like snorting coke: it’s addictive, and a main cause of bankruptcy.
Solution: Never shop when you’re depressed. Find an alternative outlet, like visiting a friend or rearranging your furniture.
2. Trying to Buy Class
Remember the guy in my opening paragraph? With all his branded crap, you’d be forgiven for thinking he had a high powered, $200k per annum job. And that’s exactly how he liked to be seen. But the reality of the situation was a sales job that made him $3500 on a good month. So why would he buy like that?
Forget about Maslow’s Hierarchy of Needs. Some people will willingly skip meals to afford a Prada. If you’re part of the middle-class (that’s most of us), you’ve been trained from birth to emulate the signs of wealth. Even if, ironically, doing so will make you poor.
Solution: You don’t get any richer by pretending to be. Until the time comes when you can afford all the branded crap you want, why mess up your cash flow? Even if you do have a Hermes handbag, you’ll be carrying it on the bus. It’s not fooling anyone. Focus on making money first, and trying to buy class later.
3. Irrational Escalation of Commitment
When we make a bad purchase, something snaps in our brain. Our subconscious refuses to admit that we’ve made a huge honking error, and tells us to stick with it. For example:
Joe Average buys a cable TV subscription. He forks out the cost of installation. But a while later, he realizes all the channels are in Swahili or confined to Hannah Montana re-runs. And the tech support is staffed by part-time triad members.
So when it comes time to renew his subscription, what does Joe Average do?
Answer: He pays up, even if its for a service he doesn’t want. Because, you know, he already paid to have the cable box installed and all.
This is a psychological effect. It’s called an irrational escalation of commitment. This is the same reason why stock brokers or investment bankers sometimes keep throwing money at bad stock. It’s a futile attempt to justify the initial investment.
Solution: Learn to accept when you’ve wasted money. If you’ve blown the money on a bad investment, then consider it a lesson. Take a deep breath and walk away. Don’t make it worse by pumping more money into it just because you’ve “already spent so much”.
Automation is a powerful tool for saving money. But it’s kind of like the conveyor belt at a Chinese canned soup factory: stop paying attention, and it’s non-existent safety standards will drag you into the shredder. Whenever you set up your bank account to make automatic deductions (into a savings account, or to pay your loans), you’re using automation.
But do you have a clear idea of all the services you subscribe to? Do you really use that monthly gym membership, or those extra channels on cable TV? Is your phone plan still the best deal on the market, or are you just lazy to check around and change it?
Solution: Out of sight, out of mind. That’s why automation can save you money (when it’s pumping cash into a savings account), or cost you money (when you subscribe to services you don’t need). Don’t get lazy and just “leave it running”. Especially for something like phone plans, constantly check for the best prices and make changes. Review your automated payments every three months.
5. Unnecessary Discount Purchasing
You can’t hold a discount in Singapore without a line forming. If a giant tsunami were ever headed this way, the authorities wouldn’t need sirens. They’d just set up Hello Kitty discount stores at the causeway. And they’d probably run up a good profit during the evacuation.
Hey, I should charge money for that idea.
Anyway, we’re so big on discounts that we start buying whenever we see one. Even if it’s crud that we will never, ever use. And we’ll come up with lame reasons like “I can still give it away on Christmas”.
Solution: Look, you don’t need it, and no one wants it. That’s probably why it’s on discount anyway. Buy stuff that you need, not random stuff because it’s cheap.
The next time you’re about to fork out some cash, think about it. Take a five minute walk before making that purchase.
Do you have any of the habits described here? Comment and tell us about it!
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