Have you ever bought something on impulse, only to regret it later? Maybe you splurged after a stressful day or made a purchase just because ‘everyone else was doing it.’ Money decisions aren’t just about numbers, they’re deeply emotional. Understanding the psychology behind our spending is the first step toward smarter financial choices.
As it is evident that emotions play a significant role in our spending behaviors, it becomes crucial to recognize the specific triggers that lead to common financial mistakes. From the thrill of impulse buying to the anxiety-driven need for financial security, our emotions often dictate how, when, and where we spend our money. Whether it's retail therapy to lift our mood, the fear of missing out (FOMO) pushing us to make unnecessary purchases, or overconfidence leading to risky financial decisions, these emotional triggers can unknowingly shape our financial habits. By understanding these patterns, we can identify the emotional cues that influence our choices and take proactive steps to make more rational, well-informed financial decisions. Now, let us understand what are the psychological factors that shape our spending behaviour.
Social Media and FOMO-Driven Spending
This is a common experience, especially when we're constantly exposed to advertisements on social media. Seeing others purchase trending products can create a sense of missing out, making us feel compelled to buy things just because many others are doing the same.
Many students experience FOMO-driven spending when they see influencers promoting the latest fashion trends, gadgets, or even online courses. Without realizing it, they feel pressured to spend money to fit in, even if it means dipping into their savings."The desire for validation and the illusion of a more fulfilling life often lead to impulsive financial decisions, highlighting the deep psychological impact of social media on our spending habits.
Tip: The 48-hour rule helps prevent impulsive spending by making you wait two days before purchasing non-essential items. This cooling-off period allows you to rethink whether the purchase is a genuine need or just influenced by FOMO.
Happiness and Impulse Buying
Unlike FOMO-driven spending, which stems from social pressure and comparison, impulse buying due to happiness is a personal emotional response. It often happens when we’re in a great mood when we are excited, relieved, or celebrating as we justify unnecessary purchases as a "reward" for feeling good.
Retail therapy, or shopping to improve one’s mood, is a common behavior, according to a Deloitte survey on consumer behaviour, the following trends highlight its prevalence:
Among younger generations:
50% of Gen Z indulge in monthly splurge purchases.
48% of Millennials do the same.
The primary motivations for splurge spending include:
50% of respondents cite self-reward as their reason.
40% of respondents do it to celebrate special occasions.
Tip: Before spending money, note down your thoughts and feelings as they will help you to understand the need behind your spending habits which will eventually help you to cut down the unnecessary expenditure.
Herd Mentality in Financial Decisions
Herd mentality is a psychological tendency where individuals follow the actions of a larger group, often without evaluating whether the decision is rational or beneficial. This behavior is especially evident in financial choices, where people may make purchases or investments just because "everyone else is doing it."
Imagine a high school student, Aryan, who sees all his classmates wearing an expensive pair of sneakers. Even though his current shoes are in great condition, he feels pressured to buy the same trendy sneakers just to fit in. He spends a large portion of his savings on them, only to realize a few months later that a new trend has replaced the old one. Now, he regrets his impulsive decision.
Tip: Have your own money matters journal, where you note down your needs and wants from time to time as this will help you to understand your psychology about money.
Conclusion:
At the end of the day, it's completely natural to have a range of emotions around spending. Money is a deeply personal and often emotionally charged topic.
The goal isn't to become a robot, never swayed by a feeling to spend. Ironically, the more we try to suppress our financial feelings, the more likely they are to burst out in impulsive ways.
The practical approach is to simply turn toward the emotions underlying your spending with curiosity. Build a habit of noticing those feelings without judgment, and then decide how much you want them to steer your financial choices versus your longer-range intentions.
Additionally, if you're interested in knowing more such topics in financial literacy then we have crafted money matters as a standalone program, or if you're seeking a well-designed and structured financial literacy course, then KCITE has a structured Financial literacy program to develop the learners into Financially literate individuals.
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