Recently I watched a video on the pain of paying by my favourite behavioural economist, Dan Ariely, which I was watching just because of my interest in the subject of behavioural economics. However, I quickly realised that this was a concept that would translate very well towards a personal finance discussion and so decided to read into the topic further and create a blog post to help you. How does the pain of paying link to your personal finances? Read on to find out.
What is the pain of paying?
The pain of paying occurs because we do not like to spend money. We are loss adverse in the sense that we want to limit the amount of money we spend. Loss aversion is the idea that losses loom larger than gains, according to research we find the pain of losses psychologically twice as powerful as the enjoyment from gains. This means a lot when it comes to the scope of applying this psychological concept to your personal finance. We can train ourselves to feel more pain from paying, thus changing our thinking towards spending less – which is good for our budgets.
How to make paying more painful
Cash or card?
Psychologists link the pain of paying with numerous factors. One of which is when the payment takes place. With a card payment, the payment is deferred and will not be visibly removed from your account for at least a couple of days. Even then, you won’t see the money missing until you actually check your account. In addition, a piece of plastic is less tangible in terms of the fact that the depletion of money is less visible and you can’t see how quickly you are depleting your balance. If you cannot use cash, then a debit card still has features closer to actual cash than is the case with a credit card.
Notifications on spending
There are many things now which allow you to monitor your spending. For example, you can get notifications from online banking apps whenever you spend money – increasing the pain of paying. There are also things like smart meters for your home which will show you how much you are spending on your electricity. All of these things will help to increase the pain of paying and therefore make you more conscious as to what you are spending.
When trying to make paying more painful, make it so that paying has the features of paying during the activity as well as seeing the money visibly getting used up.
A word of caution
It obviously goes without saying that the pain of paying results in a less enjoyable experience overall. For example, if you are on a holiday and want to enjoy yourself it may not be the best to try to make spending more painful. To decrease pain of paying on things you want to enjoy, you can prepay and then not have to worry about your spending which will allow you to enjoy the experience instead. For day-to-day consumption, we may want to make this feel more painful so that we remain within our budgets. So shopping and eating on a usual day is a good time to use methods to make you more conscious of the money you are spending. Be wise when you are making the decision of what to make more painful to pay for, as we still want you to enjoy your holidays!
Have you applied these methods to help you spend less? Tell us your story by leaving a comment. For more psychology of personal finance topics, see the previous article on self-worth. For those interested, here is the video I watched.