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Five tips to trim your spending

Spending money can create a real dent in savings. Why then does it feel so good to be surrounded by new purchases, when the dollars in your account are dwindling like sand in the hourglass? Let’s look at the psychology behind spending and how you can minimise any reckless spending behaviour.

The findings

Findings published in 2008 in the Journal of Experimental Psychology by the American Psychological Association found that people’s excessive spending habits were simple – people tend to overspend when the pain of paying is removed.

The results of the study detailed therein demonstrated that people were willing to spend more using credit, gift certificates or other non-tangible means of payment, than when they were forced to part with the physical dollar.

Moreover, if they had to estimate how much they would pay item by item, they would spend less than when faced with total expenditure. For example, people are more likely to accept payment for a three-course meal for $50, rather than paying for a $15 entrée, $20 main and $15 dessert.

Emotional money

What’s the reason behind this irrational behaviour? Well, as much as we try to think money is cold and logical, our financials are largely tied to our emotions. Also, how much we are willing to pay for an item is largely associated with what we think it is worth, rather than its actual value. 

“The more transparent the payment outflow, the greater the aversion to spending, or higher the ‘pain of paying’,” the report says. “The studies suggest that less transparent payment forms tend to be treated like [play] money and are hence more easily spent (or parted with).”

Ease the squeeze

How can you ensure you have a tight reign over your expenditure? Here are five easy tips.

  1. Track credit card statements online so you can monitor what you’ve spent.
  2. Opt for debit or savings cards, when cash isn’t an option. You’ll have a greater awareness of how much you can spend.
  3. Keep a record of credit card statements and, if possible, keep them close to the actual card. This will help create an unconscious association between the card and the ‘pain of paying’.
  4. Before any purchase, consider whether it is worth its price – in monetary terms, not by how much you want to have it.
  5. Going shopping? Leave the credit card at home!

By rewiring your spending thought processes, you’ll have greater control of your expenses. Savings will grow – a reward in itself – and you won’t be tempted by spending money.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Wednesday, July 21, 2010

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