Psychology of Spending

The Psychology of Spending | Financial Education

If you’ve ever wondered why you spend the way you spend, take a look at your relationship with money that impacts your behavior. Discover why you choose instant gratification over long-term satisfaction.


The plan is to examine your mindset and spending habits.  The goal is to understand the inner motivations that cause you to spend.  The takeaway is to identify your spending behaviors, know differences between needs and wants, and prioritize saving over spending.  Make spending decisions based on what you love and need that creates the desired lifestyle you’ve dreamed.

Psychology of Spending

Ask these questions and be honest with yourself.  Get a better understanding of your relationship with money and the motivations that causes you to spend.  An awareness of your spending habits can make it easier for you to choose between “needs and wants.”

1. Do you know your relationship with money?

2. Are you purchasing goods or building wealth?

3. Do you purchase goods that add value to your life?

4. Are you seeking instant gratification delaying true satisfaction?

5. Do you know the differences between “needs and wants?”

6. Are you sacrificing “what you love for what you like?”

Spending Habits

We often make purchase decisions without paying much mind into the thoughts that run through our minds.  We’re either responding to marketing messages or some psychological need for control. The #1 reason why we fail to reach our financial goals are due to:

Mindless Spending

– Purchasing goods that keep us from buying the things we truly want.

– Spend money on expensive dinners and drinks but wondering when you can “afford” a vacation.

– Buy a luxury car and complain about not making enough money.

Spending Rule:

A bargain isn’t a bargain if you actually don’t need it.

Spending Habits

What we need is actually much less than “what we think” we want.  We have an idea we need more than we can actually use in our lifetime.  We buy bigger homes and bigger cars assuming we need the extra space or larger tires.  This just leads to spending more to fill up the house or fill up the gas tank.  Many of our purchases are automated thus the mindless spending. The more you learn about habit spending, bargain hunting, impulse buying or retail therapy the better equipped you are in making sound financial purchases.

Habit Spending

– Not out of necessity or wants just habitual (e.g. morning coffee, lunches, brand loyalty).

Bargain Hunting

– Proactively seeking discounts and sales to validate a purchase that may be unnecessary.

Impulse Buying

– Perception of value or want/need from actual reality.

Retail Therapy

– Mood enhancing because it mimics the feeling you’re in control.

Saving versus Spending

Spending over Saving

Unknown Future: Spend rather than save because instant gratification is now and future need is unknown.

Present Bias: Making inconsistent decisions over time favoring instant gratification over long term returns.

Savings over Spending

Prioritize saving money immediately and use automation tools. Reward yourself for reaching savings goals. Build wealth and avoid lifestyle inflation.

Spending Rule:

Don’t spend more than what you make. Spending > Income = Downward Spiral

Mindful Spending

1. Awareness of how money is spent to improve quality of life.

2. Knowing purchases made today can impact ability to retire early.

3. Questioning purchases:

– Do I need it?

– Do I need it now?

– What will happen if I don’t have it?

Spending Rule:

Love it. Need it. Like it. Want it. 

Thoughts on Debt and Financing

Spending habits rationalizes the need to finance and accrue debt.  If you don’t have the cash, don’t spend on credit.  There are some rational reasons to purchase on credit when you’re buying long lasting assets with short lasting financing.  For instance, don’t finance a car for 8 years just to keep the monthly payments manageable.  Don’t finance any item for longer than their usable life.

Also, just because you’re approved for credit doesn’t mean you can afford it or spend it.  Before making any purchase using credit ask yourself, “How does the loan or line of credit to purchase improve my life long-term?”

Debt Spending is Allocating Future Time

Your time is the most valuable asset you have and by using debt to finance purchasing you are allocating your future time to pay for that purchase.  Financing a new smartphone that cost $600, while you make $10 an hour, means you’ve allocated 60 hours of your life and free time to work to pay for that purchase. Are you okay with that?

Ask yourself, “Do I have cash to make the purchase now or am I willing to work more hours in the future to pay for it?”  There is nothing wrong with spending. Make sure you’re aware of how you spend and what you’re spending on.


What tool can help you prioritize savings, change your spending habits, curb impulses and achieve your financial goals?

The Six Letter Word – BUDGET

Budgets make people feel uneasy because they are associated with limitations. It may make you realize there might not be enough money.  There is also a fear of lifestyle change.