How Much Life Insurance Do I Need?
The Role Life Insurance Plays in Your Finances The purpose of life insurance is to...
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Make a budget and stick to it. This is possibly the most basic, and most regularly repeated, piece of personal finance advice there is. It’s also a very simple concept. There’s a straightforward process for working out your expenses and designing a budget. It’s the ‘stick to it’ bit that’s not so easy.
People tend to overlook that sticking to a budget isn’t just a practical concept. A lot of spending is about mindset, emotions and environment. There are a few reasons you’re not sticking to your budget, and just being aware of them can help you make changes, to bring your lifestyle back in line with your finances.
As Dave Ramsey, author of The Total Money Makeover, points out, we’re all inclined to “buy things we don’t need with money we don’t have, to impress people we don’t like.” And when it comes to people we do like? It’s no better. Young people in particular are highly likely to allow their spending habits to be influenced by the spending habits of their closest friends.
If you’re spending money to impress others, you need to take on board that you’re sacrificing your own happiness along the way. If you’re spending to impress people you don’t like, you’re actually prioritising those people over your own future financial security. Stop making the opinions of those you don’t like more important than reaching your own financial goals.
We’re far more likely to blow our budget when under the influence of others, who may not even have one. If your friends fall into this category, maybe it’s time to start being the good influence on them, rather than allowing them to be the bad influence on you. Start planning things to do with your friends that align with your budget, and feel free to say no occasionally, to social plans that don’t. And as you make new friends? You might want to choose them carefully. They could well impact your finances in the future.
We all think we’ve become ad blind, but we’re much more susceptible than we like to think, both to direct advertising, and other marketing ploys. There’s some evidence that we may now be exposed to up to as many as 5000 ads a day, and they’re much more sophisticated than they once were. Advertising paints a picture of a better, happier, freer life, and we fall for it more often than we realize.
It’s not just direct advertising of course. You can’t walk into a high street store without being exposed to a number of marketing tricks that encourage you to reach for your wallet. Everything from where items are displayed, to color schemes, to special offers and discounts, will pull us in, and it gets even worse around the holidays and at other ‘high-spend’ periods like back to school time.
Add to that the fact that most of us can’t go into our own inbox without falling over marketing emails offering us discounts and offers, right next to a direct link where we can buy the product without leaving the comfort of our couch. No wonder impulse spending is a problem for most of us, and so many of us find that sticking to a budget is so much harder than making one.
I’ve written before about how your brain has no idea what will make you happy, and this is rarely more true than when it comes to how we spend our money. Shopping is a highly emotional experience for many people, because we truly believe that owning a particular product will have an impact on our happiness and emotional well-being. This is because the brain plays tricks on us, and when we spend out big and blow our budget, the brain plays another trick on us.
The human brain does this thing psychologists call ‘hedonic adaptation’. It feels the pleasure of a new purchase, then quickly adapts to the pleasure of actual ownership, decreasing the pleasure as it does so. This happens with both small purchases and big ones. Whether we buy a designer outfit or a new house, our brain will adapt. The outfit will become just another addition to an already over stuffed closet. The house will become just ‘where we live’.
We have this false expectation, especially with bigger purchases, that exceeding the budget will have an emotional pay-off, and it does, initially, but mostly, it doesn’t last. We may even have the expectation that this purchase will change us, fundamentally, but it doesn’t. We’ll still be paying the huge mortgage off, long after the brain has adapted to the new house. And the expectation that we’ll be a whole different person, if we just live in this area, or drive this car, or wear this brand, inevitably leads to disappointment.
We can’t avoid other people, marketing, or the tricks our own brains play on us, but being aware of them can, perhaps, make us think twice before straying from the budget we sat down and took the time to draw up.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.