You earn a great income – why are you still broke?

Whether you’re earning $150,000 or $60,000, there are some very simple reasons why you may be feeling broke, and money may have nothing to do with it.

If you’re not happy with your financial situation and you’re earning a decent income, it’s time to ask yourself some tough questions – and I’m not talking about where you are spending but why you are spending.

Money is intrinsically linked to our emotions. Most of us probably get this. We know that if we’re stressed we look for relief (Bellini, anyone?); if we’re not feeling that beautiful we look for things that make us feel good (shoes do it for me); and if we’re feeling a little blue we look for things that make us happy.

Given the complexity of why we do what we do, I thought it best to get the help of a behavioural economist – even better, a behavioural economist who’s also a psychologist. Phil Slade is just that!

Why can somebody on $50,000 save as much as somebody on $100,000?

I understand how somebody on $50,000 may be able to save as much as somebody on $100,000. On $50,000 you’re probably young, starting out with no debt, at least not as much as a 40-year-old with two kids. And if you’re like most 20-somethings who are serious about saving, you’re quite happy to share accommodation, maybe even rent a couch and just live on two-minute noodles.

But assuming we are talking about two people of similar age, stage and circumstance, how is it possible for the lower-income earner to be able to save more? When I asked Phil this question, he said that a “fascinating psychological phenomenon comes into play here – it is a problem of relativity, it is a struggle with loss aversion”.

Basically, if someone on $50,000 (about $813 a week after tax) considers spending $500, the pain of the loss relative to their income is much greater than the loss felt by the person on $100,000 (roughly $1442 a week after tax) when considering the same $500 purchase.

Therefore, because a large part of our spending consists of many smaller purchases, the person on $100,000 is likely to spend more because it doesn’t feel so painful when each ‘loss’ seems small relative to their overall income (rather than the immediate state of their bank account). This can have the effect of making money more fluid and harder to save. The person on $50,000 feels a greater pain for every small purchase, making money less fluid and therefore easier to track and save.

5 triggers and the fixes

The good news is that it is possible to change your money behaviours. The trick is to see saving as a skill rather than an intellectual competency. This way you know that if you practise you will get better.

“If you want to start running, you don’t just enter a marathon; you train and see yourself slowly improving. If you started with the marathon you would simply fail and then never try to run again, living with the belief that you can’t,” says Phil. Finances are the same; you can just say, “I’m no good when it comes to money.” Often there is a reason why you do what you do and this can come down to the triggers that trip you up. A trigger is simply something that encourages you to spend money needlessly. Emotions are the general culprits for setting off triggers but things like easy credit and a simple sale can be, too.

While there is nothing wrong with acting on your emotions, they need to be acted on without taking on debt. If it doesn’t fit within your budget, best you substitute spending with something to help celebrate or make yourself feel better.

“In the long run, giving into these things that trigger your spending will only make you struggle with your budget or lead you into a great deal of debt down the road. You must learn to control your emotions, disempower them; they are not your friends. If we can’t keep our emotions in check, then we’re unlikely to be able to keep our spending in check either,” says Phil.

Here are five triggers to watch out for and Phil’s solutions to not tripping up.

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Trigger 1: I had a crappy day

Whether it’s because of work deadlines, the stress of getting the kids to school and then coming into work an hour late, a fight with your partner or just not feeling 100%, stress can definitely trigger your spending. You are looking for a distraction to take away the pain.

A similar thing happens if you have a great day. Sometimes you just want to celebrate feeling great. Maybe a pay rise got you in a good mood, you reached your sales target or you’ve managed to take your lunch to work every day this week. The attitude of “I deserve it!” often justifies a spending binge.

So what do you do? Organise dinner with friends on Saturday night even though you can’t afford it. Hit the shops for a quick retail fix … whatever takes the stress away or heightens your feelings of joy.

What Phil suggests you do: Trick yourself with multiple accounts. He suggests splitting your bank account into multiple accounts and naming them for specific purposes. It limits spending to the account you have your card attached to, it highlights the consequences of robbing one account that’s earmarked for a particular expense and it means you are less likely to spend large amounts.

This last impact is fascinating, because although it doesn’t make rational sense, if we have 10 accounts with $1,000 in each, it feels as if we have less than if we had a single account with $10,000 in it. Therefore, spending $500 out of an account with $1,000 in it feels like more of a hit than spending $500 out of an account with $10,000 in it. In the first instance, you have lost 50% of your money and in the second you’ve only parted with 5%. This phenomenon is called mental accounting – we just seem to be wired to need to put things in ‘buckets’. While it may make financial sense to put all your money in one high-interest account, it doesn’t always make good human behaviour sense.

Trigger 2: I’m nowhere near my credit limit or I can buy it now and pay for it later

Credit cards and buy now and pay later services give us an easy way out. You know you don’t have the money to buy it but somehow you justify it. “I’ve got some money owing to me so I can pay the card off then.” “I only need to put down a small deposit and I can pay it off slowly.”

It’s all about instant gratification and because we’re not parting with cash we don’t feel the pain! And while buy now and pay later services aren’t credit cards, these digital disruptors are tempting us to shop more because it’s so much easier to buy something you think you have to have when you only need to pay $50 a fortnight rather than $200 upfront. I almost bought something this way and maybe it’s my age but I decided to wait and save. Funny thing is, when I had saved the cash I just couldn’t justify the spend.

So what do you do? Spend without guilt but know that buyer’s remorse will kick in when your statements come.

What Phil suggests you do: If you do want to buy something you can’t afford, resist the urge to go into a repayment scheme. The first thing to do is create what I call a self-made lay-by system. Figure out what the weekly repayments would be and put that amount each week into a separate account until you’ve saved up the purchase price (or at least a large portion of the purchase price if it’s an expensive item like a car). This will save you money on interest, test whether you can afford the repayments, help you avoid credit traps, and give you time to think more rationally about the purchase.

Another thing to do is to plan ahead for when you will be tempted by an impulse buy that will put you into debt by intentionally putting some ‘resistance’ in the purchase process. For instance, set up a rule with your partner (so you can be held accountable) where any credit or debt purchase needs to be discussed with someone not emotionally involved in the purchase. It needs to be someone who won’t directly benefit or get personal gratification from the purchase. This conversation or ‘credit purchase check’ is putting resistance in the purchase process and reduces the emotionally reactive desire for instant gratification.

Trigger 3: I live through social media

Social media isn’t just eating your data but your wallet, too. One study to come out of the US by two business school researchers found that social media really can influence the amount of money you spend, with Pinterest singled out as the platform likely to make you spend the most.

So what do you do? A glass of red wine, a credit card by your side and you’re off! In browsing from one social platform to another, your visionary sensors are in overload and for whatever reason you feel the need to furnish your home with cushions because, hey, your bed can never have too many cushions, right?

What Phil suggests you do: Try cutting up your credit cards and disconnecting from social media. “Seriously. Unrealistic social comparisons and easy access to credit are a dangerous mix. Often I hear the following scenario: check Facebook – feel inadequate. Click on online shopping site – buy something to feel good again. Feel guilty about spending money – retreat to Facebook to feel connected. And so on. Avoid situations that make you feel worthless. Social media can do this. When you feel worthless you are often likely to act in ways to replenish your sense of worth. It’s why some people buy a cream bun after going to the gym or buy countless coffees a day to escape a depressing office.

“Do yourself a favour and construct your environment in a way that helps you. When it’s a negative environment you can’t escape (such as a stressful home life), increase your awareness of your emotional reactivity in the environment and find ways to restore your self-worth that doesn’t require spending money.”

Trigger 4: But it’s on sale!

Our brain does funny things when we see a 40%-70% off sale. We start focusing on the savings rather than the spending. Throw in free shipping, “limited offer” or “only one left” and we jump on it!

So what do you do? Buy it, of course! “I’m saving 70%.”

What Phil suggests you do: There is an old negotiation saying that goes “if you can’t walk away from a deal then you won’t get a good deal”. Picture yourself walking away from the purchase and see if life goes on. If so, then maybe you should let it go. Still want to buy it? Then try mitigating the effects of ‘anchoring’ – a little trick retailers use to present a number directly preceding a sale price (the ‘original’ price or RRP) in order for our brains to judge how valuable something is. The higher the number presented, the higher the perceived value, the more people will pay for something.

Avoid being tricked by using your phone to search other stores for the price of the item. Psychologically this ‘anchors’ you to a more realistic number and gives you a better idea of the real value. If you do find it cheaper elsewhere, tell yourself, “This will be my gift to myself in a few days.” Finding relevant information and practising ‘delaying gratification’ reduces FOMO, stops you making impulse buys, and changes the ‘loss’ equation to focus on how much you are losing out of your account, as opposed to losing out on a great deal.

Trigger 5: Keeping up with the Joneses

When we earn more we are more likely to gravitate to communities that reflect our income, or our aspirational income at least. Within these communities, there are unspoken norms that influence the type of car you drive, the type of clubs you belong to, the events you go to, the way you spend your recreational time, how lavishly you entertain, even the expected price of a good cup of coffee.

So what do you do? You keep up with appearances, spending loads of money until you can’t afford those ‘necessary’ luxuries.

What Phil suggests you do: Have a savings buddy or share your goals. “We need to learn to be content with who we are and our real socio-economic status. The greater the distance between the selves we present to others and our ‘real’ selves, the greater the chances we will make poor decisions that compound our financial stress. Resist the fear of being judged and revel in the fact that you are getting better, rather than focusing on how much worse off you think you are relative to someone else. Imagine if we created savings groups that acted like running groups, where we shared our savings progress and congratulated each other simply for improving on our monthly personal best? Imagine that!”

This is an edited extract from A Real Girl’s Guide to Money: From Converse to Louboutins (Are Media Books, RRP $24.99) by Effie Zahos.

Cover image source: Mallika Home Studio/Shutterstock.com