Finance

Non-financial Financial Literacy

financial literacy

My wife and I are excited about an opportunity to help teach financial literacy to some university and high school students. Our first thought was how do we share our experience when it comes to the basics such as interest, compounding, taxes, credit, inflation and savings. Our second thought was that will probably bore them. So instead we came up with a different approach based on our retirement experience.

When planning our retirement, we focused on finance – expenses, inflation, income and assets. It wasn’t until after we retired that we became more aware of the non-financial side of retirement – social activities, relationships, interests, purpose and health. This got us thinking whether there’s also a non-financial side to financial literacy.

What came to mind was spending. But not in terms of numbers, but in terms of why we spend – the emotional and psychological reasons that drive our spending decisions. For our teaching purposes, that’s how we choose to frame the non-financial side of financial literacy.

Emotional Spending Triggers

So why do we spend? Obviously, we spend to satisfy our needs. We also spend to satisfy our wants. And that’s where emotional spending triggers can wreak havoc. Here are a few bad spending habits driven by emotional triggers.

  • Competitive spending. This occurs when we make purchases that are aspirational or the result of virtual peer pressure or are culturally driven. One of my podcast guests, Gina (episode RH 023) comes from a cultural heritage where spending is expected and encouraged. For example, if there was a family event to attend, she had to buy a new dress. It was only after many years, a lot of debt and a desire to buy a home (with her dream kitchen) that she realized she had to change her spending habits and become a saver.
  • Shoppers high. This is like the dopamine rush that runners experience. According to data gathered by Harris Interactive, 31% of women say that they’ve shopped specifically to elevate their mood, and 53% of people have shopped as a way to celebrate something. Shopping makes us feel good.
  • Spending to save. Sellers use some of the oldest tricks in the book such as discounts, coupons and deals to separate us from our money. So we spend and congratulate ourselves on how much we saved – not really thinking about how much we spent.
  • Spending as therapy. People resort to various ways to feel better, alleviate boredom, express their self-worth or resolve a problem. Some people have a drink, some have ice cream and others go shopping. What these remedies have in common is that they make you feel better in the short term but don’t actually resolve anything and they can make things worse!

Why it Matters

The bottom line is that it’s hard to save and build wealth if you have bad spending habits. Plus if you run up too much credit card debt it can affect your credit score which can limit what you can buy and increase the interest rate you pay. Then there’s fighting over money which is the second leading cause of divorce (infidelity being the first). So even if you’re not worried because you think that you have plenty of time to save, keep in mind that it is always, always easier to get it right at the outset than thinking you can fix it later. It’s never too early to develop good spending habits!

How to Improve Your Relationship with Money

Here are some ways that can help you avoid making bad emotional spending decisions and start building good spending habits.

  • Use a pre-paid debit card.
    • Avoid typical checking account fees and charges.
    • See and track your purchase history. (This is very important.)
    • Set up email and text alerts to be notified if you spend over a certain amount.
    • Use sub-accounts (aka envelopes) to manage different household costs (like groceries) which can make it easier to manage that spending.
  • Some prepaid debit cards can help you save. The Walmart MoneyCard issued by Green Dot Bank allows you to put money into a savings vault and enters you into a monthly sweepstakes with a chance to win money.
  • It’s said that we take on characteristics of our 5 closest friends. Think about your 5 closest friends. What do they value? What are their spending habits? What influences them? How much do they influence you? If too much of the behavior you want to change comes from your friends, maybe it’s time to change things up.
  • Ask yourself if you would buy an item if it wasn’t on sale. If you answer no, then don’t buy it. Think in terms of what you’re saving by not spending instead of the reverse.
  • There’s a difference between wealth accumulation and accumulation of stuff. Stuff decreases in value over time whereas savings increase.
  • Understand that the only way to save is to live below your means.
  • Find blogs and podcasts that are geared about money for people your age. Check out 10 Best Personal Finance Podcasts for Millennials.
  • Listen to episode RH 026 of my podcast to learn how Jackie Cummings Koski, a single parent and the youngest of 6 from a single parent family, used the iconic $2 bill to start her savings habit which has helped Jackie achieve financial independence at age 48!

Wrap Up

Our goal is to help students develop good spending habits in part by understanding how emotions and psychological factors affect spending decisions. We want our students to learn to question their spending “wants” before buying. Hopefully they’ll learn to make their own decisions without falling victim to emotional spending triggers. Better yet they learn to get a dopamine rush by saving instead of spending.

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