I said in my last blog that I would follow up on some financial concepts in this countdown to Christmas. Now some of you may not have finished your shopping (well that’s me too) or may not have even started. So what are some behavioural finance facts that you should take shopping with you?
When I talk about this area, I ask people who is using the first mobile phone they owned? This gets a laugh. We have all made many purchases that we can hardly remember. However, new work combining psychology and marketing principles by Elizabeth Cullen Dunn and Michael Norton lets us in on the secrets of how to spend money to make yourself happier. In their book, Happy Money: The New Science of Smarter Spending, they discuss five ways we should spend money to make ourselves happy. This list is definitely the one to reflect on as you head off Christmas shopping:
1. Make it a treat. Their research has found that occasional treats makes you happier than having them all the time. Too much of anything is not a good thing, so focus at Christmas on what is truly a treat. Perhaps quality over quantity is the right theme here.
2. Buy time. We are all time poor, so spending money to give you back time makes a happier life. A gift that takes a busy person time to do might not be the most appreciated gift.
3. Buy experiences not stuff. You may remember your first mobile phone, but do you even know what number mobile you’re up to? You will not remember your sixth mobile phone as much as you will remember a special concert or holiday. Spend money on an experience for someone – the massage or special dinner.
4. Spend on someone else. If you are more generous, you become a happier person. Research shows us that even buying someone a coffee in a day puts you in a better mood. Christmas is definitely a time when you can exercise that generosity muscle – and not always just for those you are close to, but the many others deserving our care at this time.
5. Pay in advance. People are happier if they have all the fun of anticipating an event, a holiday or Christmas, without an ugly financial cloud over their head. Credit card debt is ugly because the pain lingers after the fun is gone. Pay in advance for Christmas and you’ll increase your pleasure of it.
Now what if you, or someone else you know, is in a hole with money? What if you or they are going to face some serious bills after Christmas because they didn’t manage number 5 above? Well firstly, deal with it quickly – bad news doesn’t age well! I’m a big one for learning from as many sources as I can and some of the best tips I have found come from Elizabeth Warren and Dave Ramsey.
Dave Ramsey’s book The Total Money Makeover, encompasses seven financial steps (some are a little US centric). Of particular note though, he uses behavioural principles to pay off debt. He talks of starting a debt snowball by clearing the smallest debt first and then using those payments to clear the next smallest and so on. This gives people a feeling of progress and success. Dave Ramsey has a huge following online, and if inspiration is needed to clean up debt, many of his budgeting fans post detailed videos on Youtube.
Elizabeth Warren, an ex-Harvard finance professor and now a US Senator, suggests getting your expenses into a ratio of 50% for essentials (e.g. rent, petrol, basic food), 20% for saving and 30% for wants. This formula leaves people with wiggle room if anything goes wrong in their lives. Google "50 30 20 budget" for more on this.
Obviously, there’s also professional help for those who need assistance or guidance with belt tightening. Financial counsellors are professionals who work in this space and can be contacted through community organisations.
Don’t forget to focus on the greatest resources you have - time, money and health and design your money to match the life you want.
Until next time.