The Psychology of Spending Money You Don't Have
For many college graduates, the first few years after graduation can be a financial struggle. Student loan debt, coupled with the high cost of living in many cities, can make it difficult to make ends meet. And yet, despite all of this, many young adults continue to spend money they don't have— often without even realizing it. So, what's going on here? What is the psychology behind spending money you don't have? Let's take a closer look.
The sunk cost fallacy is one explanation for why we continue to spend money we don't have. This occurs when we continue to invest in something—whether it be a relationship, a job, or a material object— despite the fact that it is no longer providing us with value. We do this because we convince ourselves that we have already invested so much time/money/effort into the thing that we may as well see it through to the end. Even if doing so is not in our best interest.
Another reason why we spend money we don't have is because of something called hyperbolic discounting. This occurs when we place a higher value on immediate rewards than on future rewards—even if those future rewards are actually more valuable to us. In other words, we would rather have a small amount of money now than a larger amount of money later. This can lead us to make poor financial decisions, like spending money we don't have now on things that we will eventually have to pay for later (with interest).
And then there is something called psychological reactance. Reactance occurs when we feel like our freedom is being threatened. When we perceive that we're about to lose our ability to make choices, we experience a natural impulse to rebel. And that impulse manifest itself in all sorts of ways—including overspending.
Think about it this way: when you feel like you can't say no to a purchase, it's because you're afraid of losing the opportunity to buy something. It's the fear of regret that causes us to spend money we don't have. And it's a very real phenomenon—one that companies capitalized on long before the advent of credit cards.
Next time you find yourself spending money you don't have, take a step back and ask yourself why you're doing it. Are you falling prey to the sunk cost fallacy? Are you discounting the future value of your hard-earned cash? Are you buying something because you need it or because you're afraid of losing the opportunity to buy it? Understanding the psychology behind our spending habits can help us make better choices with our money— choices that will help us stay out of debt and avoid financial hardship down the road.