How to Avoid the Financial Dangers of Spaving, from FICO
Spaving might not be a household term, but it’s a concept almost everyone can relate to—and something you’ve likely done before. It refers to when people spend more money in an attempt to save money, such as when you add another $20 worth of filler items into your cart to avoid a $10 shipping charge. What follows is what you need to know about spaving and how you can avoid it, from myFICO.
Is Spaving Bad?
Spending more money now to save money, in the long run, can be a good idea. Perhaps you’re able to lock in savings by purchasing an annual subscription for a service rather than paying month-by-month. Or, you invest in high-quality products that last decades rather than replacing cheaper, lower-quality products every few years.
However, spaving usually has a negative connotation because it refers to impulse purchases rather than thought-out decisions.
You might feel like getting 90% off a $100 item is saving $90. But if you weren’t going to buy that product before, you’re spending $10 more than planned. In the end, you’re $10 poorer, even if you feel good about getting a deal.
Look Out for Marketing Tricks That Encourage Spaving
For decades, researchers have explored the field of behavioral finance to uncover how our biases can influence financial decisions. In turn, companies use these insights to inform their marketing material and try to get shoppers to spend more money.
If you know what to look for, you can spot the ways that companies encourage us to spave:
Setting a high anchor price: Anchoring is a fairly well-known concept where your mind uses the first piece of information it receives as an anchor for making other decisions. When you’re shopping, a product’s original price acts as an anchor that can signal value and relative savings.
Consider a shirt that was originally $120 and is now on sale for $50. The $120 price tag tells you (even if only subconsciously) that it’s a luxury product, and the sale price means it’s more than half off.
Anchoring also plays into relative costs, such as when someone buys a car and is offered expensive upgrades that seem inexpensive compared to the car’s total price.
Pushing you toward the “middle” product: If a company wants you to purchase product Y for $125, it may show you how it compares to product X ($75) and product Z ($300).
But the high-priced product Z isn’t intended to be a realistic alternative. It’s there to make you feel like product Y is the practical, middle-ground option. You may feel like you’re saving money by avoiding Z but wind up spending more than you would if you only compared X and Y.
Wording sales in different ways: In terms of cost, there’s no difference between getting two products for 50% off and a “buy one, get one free” sale. But there can be a very real difference in how our brains react to getting something for free.
Keep this in mind, particularly when you might wind up buying a perishable good that will go bad before you get a chance to use it.
Highlighting scarcity: Companies can use scarcity in different ways to make you feel compelled to act quickly and make a purchase.
For example, you might see that an item is on sale, but there are only 15 left. Alternatively, you may be offered a limited-time coupon or see a large clock counting down until a sale ends. In either case, the message is the same—better buy now before it’s too late.
Offering social proof: People tend to use others’ behavior and actions as an indicator of what to do and buy. Social proof can take different forms, such as hiring an influencer to promote a product, showing customers’ reviews, or displaying how many people have recently viewed or bought a product.
Each of these can make it easier for someone to justify a purchase.
Often, these tactics aren’t used in isolation. For example, you might be presented with three similar products and their prices (pushing you to choose the middle one and anchoring), each has hundreds of positive reviews (social proof), and there’s a limited-time sale (scarcity).
With all this in mind—and other strategies as well—it’s easy to see how companies can urge people to spend money while simultaneously feeling like they’re saving money.
Two Ways Our Brains Can Confuse Saving and Spaving
The behavioral finance-backed marketing tactics rely on human biases and, as the name implies, behavior. But in addition to marketing, there are a couple of ways that people may trick themselves into spending more than they planned:
We compare costs to our current financial situation: The first relates to anchoring, but our current financial situation is the anchor rather than the price of a product.
For example, if it’s early in the month, your budget may be filled, and you could be more susceptible to making impulse purchases. But as the month goes on, each dollar represents a larger portion of your remaining budget, and you become more conscious of how much you’re spending.
One way people use this to their advantage is to shop with a specific amount of cash on hand. As a result, they’ll naturally compare prices to the cash in their wallet rather than their monthly budget, how much they have in a checking account, or their credit card’s credit limit.
We don’t fully consider opportunity costs: The second is how we often narrowly frame our options.
Perhaps it’s the end of the month, and you have $50 left in your grocery budget and everything in your cart only adds up to $40. Then you see a favorite snack is on sale—two for $10.
You’ve mentally allocated the money for food, and it may feel like the decision is to buy it now, while there’s a sale, or buy it later at full price.
You may be saving a few dollars compared to buying the snack later, but you’re also spaving $10. The narrow framing means you fail to consider all the potential ways to use the money to buy something else, save, or invest.
It may not seem consequential when it’s a snack and a few dollars, but the same principle comes into play when people make more substantial purchases, such as cars and homes.
Spave With a Purpose
Even with an understanding of our biases, overcoming these tendencies and desires can be difficult. It’s worth noting that spending a little more than you planned because there’s a sale or limited-time opportunity could be a good choice. However, you don’t want to fool yourself into thinking you’re saving money when you’re not.
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