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Aaron Hitch
Aaron Hitch

Financial Adviser

Melbourne

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How to buy happiness - The psychology of spending

The silly season is well and truly upon us and our wallets. According to the Australian Retailers Association (ARA) and Roy Morgan, Australians will spend more than $51 billion across retail stores over the Christmas trading period, a 2.9 per cent increase over the previous year. Considering that most of us regret spending too much and feel annoyed by how much more ‘stuff’ has entered our home, this doesn’t seem to be something we actually enjoy. Then why do we do it?

To answer that question, we need to understand our financial thinking and behaviours.

If you know how much money is in your wallet, and keep a record of what you spend, you’re probably a saver. If, on the other hand, you have no recollection of spending that $50 you withdrew on the weekend and make plans without considering the costs, you’re probably a spender. One personality type is not inherently better than the other. What’s important is that we understand what governs our financial thinking.

Our brain shapes whether we’re spenders or savers

In a recent study, participants’ brains were scanned as they pretended to make buying decisions. Researchers observed activity in an area of the brain called the insula, which is stimulated when you experience something unpleasant. The more stimulation in the insula, the less likely you are to keep doing what you’re doing. They concluded that people with greater insula activity are likely to be savers, and those with less tend to be spenders.

Money does make us happier but only to a point

New research from Purdue University found that emotional wellbeing peaked when individuals earned between $60,000$75,000 USD ($85,000 -$100,000 AUD). Positive life evaluation, or how people feel they’re doing compared to others, was found to peak at earnings of $95,000 USD. After that, happiness was related to how money was spent; with experiences, giving back and strengthening close personal relationships topping the happiness scales.

Shopping can be fun but constant materialism is draining

Black Friday – the global phenomenon of 24 hours of discounted internet deals was recently upon us, and now we’re in the midst of Christmas shopping and will soon have the Boxing Day sales. Not to mention the daily ‘hot deals’ flooding our inboxes putting people in a constant state of purchase evaluation. The Paradox of Choice, coined by psychologist, Barry Schwartz, shows the more choices we have, the harder it is to make a decision. And if we do overcome our analysis-paralysis, we end up exhausted and less satisfied with our purchase than if we’d had fewer options to choose from.

The pain of losing money is worse than the joy of gaining it

Introduced by psychologists Amos Tversky and Daniel Kahneman in the early 90s, loss aversion theory states the pain of losing something is greater than the joy of gaining something. It’s the reason people are more likely to stay in a job that makes them miserable, than risk losing income to find a more fulfilling job. Loss aversion is one of several behavioural finance mistakes investors commonly make. Which is why most people need professional investment advice. One of the keys to FMD’s formula for investment success is removing these behavioural biases from investment decision making.

Having a financial plan makes people feel happier

The FPA’s “Live the Dream” Survey into the financial habits and beliefs of 2,635 working age Australians conducted by McCrindle Research in May 2017 found those people happiest with their lot in life were also most likely to have a financial plan. For 57% of respondents the measure of happiness was having the lifestyle of their choice while for 54% it was having financial freedom and independence. We rest our case.


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