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I LIKE TO THINK I’M rational in the way I spend my dollars, and I suspect most readers do, too.
We are, of course, deluding ourselves.
Spending is never simply about buying what we want or need. Instead, behind every dollar that leaves—or doesn’t leave—our wallet is a complex mental dance that reflects how we feel that day, the influence of others, how we want to be perceived, and our own financial history. We might declare that we’re using our money to buy happiness. But the truth is far more complicated.
Part Three of Six
To make matters worse, it can be hard to tease out why we’re behaving the way we are. How exactly are others influencing us? What precisely are we trying to signal to family and friends with the way we use our dollars? Why were we disciplined yesterday but spending impulsively today? Which of our past financial experiences is driving our behavior?
Want to be a little more sensible in how you deploy your dollars? Here are just some of the things that are likely driving your behavior:
Needs. Folks will declare that they need certain items. But our true needs—basic nutrition, shelter, medical help when sick, transport to our place of work—are pretty modest and, if we were inclined to skimp, would likely devour a small percentage of our income.
Wants. Because our “needs” are rarely just that, it’s often hard to separate them from our “wants.” A Caribbean vacation is clearly a want. But what about the imported parmesan that we sprinkle on our salad? It would be hard to argue that it’s merely a cheese that delivers part of our daily protein needs.
Mood. Why do folks spend more freely when they’re on vacation, or splurge when they’ve had a rough day at the office, or treat themselves when they feel they’ve behaved well? Clearly, our mood affects our willingness to spend.
I’m especially intrigued by the idea of a “willpower budget,” perhaps because I see it in my own behavior. If it’s been a taxing day and my willpower is at a low ebb, I’m much more inclined to eat less healthily for dinner and perhaps have that second glass of wine.
Others. Whether it’s the items we buy, the places we vacation or the investments we purchase, we’re often influenced by others, whether we know it or not. We might be responding to a casual comment from neighbors or spurred on by the latest corporate advertising blitz. The danger: We’re nudged into spending money in ways we later regret or that don’t reflect our desires and priorities.
Signaling. Even as we get nudged on our spending, we’re also hoping to influence others. Whether it’s the second-hand car that says we’re frugal or the carefully cultivated garden that says we prize beauty and order, we’re constantly trying to tell the world who we are and what we value. And, no, we don’t necessarily have to spend to get our message across. For instance, simply alluding to our portfolio’s size or our home’s value can boost our standing in the eyes of others.
History. Even as we look to the future, we’re all shaped by the past. My parents and grandparents were all careful spenders, whether out of necessity or because they viewed extravagance with distaste.
This was reflected in the family stories that got told. My paternal grandfather would talk about how he was all but starved by the aunt who raised him. My mother often recounts how the great family fortune was frittered away by the prior generation. My father would regale others with his mischievous penny-pinching, such as how he’d use the facilities at Virginia’s Homestead Resort while staying at a nearby motel.
Security. One of money’s most important roles is to deliver a comforting sense of financial resilience. That, of course, stems from the dollars we opt not to spend. How much do we need to set aside to feel safe? The answer will vary for each of us.
If we’re constantly in danger of getting laid off, it would be rational to keep a fat emergency fund. What if there’s scant risk we’ll lose our job, but we have visceral childhood memories of our parents struggling to find work? A fat emergency fund might not be a financial necessity for us—but it could still be crucial to our peace of mind.
Future self. We use our dollars not just to buy a sense of short-term financial security, but also to give us confidence about the decades ahead. How concerned are we about our future self, and hence how much are we willing to sacrifice today so we can have a more financially comfortable future? This is a puzzling one, with a minority of folks making ample provision for their later years, while most folks put aside surprisingly little, even as they frequently lament their lack of retirement savings.
Legacy. We save money not just for ourselves, but also for future generations—and this isn’t just something the wealthy do. How many retirees view their home’s value as untouchable, because they want at least that money to go to their kids? It’s a sentiment I’ve heard countless times over the years.
Giving. We give not just to family, but also to others, including charitable organizations and our place of worship. I’d never want to impugn the motive of those who give generously. Still, it’s clear that giving can bring as big a smile to the giver as the recipient. Why does generosity make us happy? As with all uses of money, there’s no single answer—and instead, for each of us, the challenge is to understand what drives our own behavior.
Check out the two earlier articles in this six-part series: Money Grows up and Taking Center Stage.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.
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When I was in college a very long time ago, I was taught traditional economics which assumed we were all logical rational beings looking to maximize our economic utility. I bought it, hook, line, and sinker. How could I have been so dumb?
My relationship with money is still a work-in-progress but is much better than it once was thanks to Jonathan.
My wife and I met for brunch on Saturday with the couple we are going to Hawaii with later this month. As we reviewed our upcoming plans, we coincidentally (before I had read Jonathan’s post) got around to discussing our money foibles. Perhaps my most bizarre: Every morning I wash down my morning meds with a glass of Low Sodium V8 juice, and after discovering that I could subscribe to a six-bottle shipment from Amazon for $0.80/bottle less than I can get it at the cheapest grocery store in my area, I jumped at it! Given that I go through a bottle a week, this saves me around $42/year, about half of what I spent on brunch yesterday when I picked up the tab. In all, as of the market close on Friday, the amount I “save” on V8 annually is less than 0.0025% of our liquid net worth.