Moderation is the Key

We often feel guilty when we make an expensive purchase. After all, conventional wisdom dictates that every penny must be saved or invested.

Scott Rick, a University of Michigan marketing professor, together with other researchers, conducted a study to quantify how people feel about what they buy. During the course of the study, they discovered something quite unusual.

Big spenders usually don’t feel enough pain and end up overspending and having more debt as a result. On the other hand, cautious spenders endure too much pain and feel regretful afterwards for not having spent enough. Rick says it’s better to be a cautious spender because of the financial gains, but the best position to be in is the middle of the spectrum.  “Spendthrifts are bad off financially and psychologically,” he says. “Tightwads have big bank accounts, but we find that they’re less happy than the unconflicted [middle] group.”

George Lowenstein, a professor of economics and psychology at Carnegie Mellon University, has also looked at this phenomenon. He concluded that the “pain of paying” is more intense with cash payments because cash is a physical entity and spending it results in having less cash in your wallet. Knowing that cash “evaporates” after being spent, you are less likely to spend it in order to avoid the pain. Using a credit card does not signal a direct connection. Unfortunately, instant gratification translates into pain once the bill arrives several weeks later.

Next time you reach for your cash, debit, or credit card, consider this:

  1. Does this fit in my budget?
  2. Is this something I really need?

If you answered yes to both questions, you should be able to avoid the pain and mentally enjoy the purchase.

Source: Don’t Punish Yourself Every Time You Spend