Feeling Rich? Careful How You Spend
When your shares are doing well and your home is increasing in value, beware of the ‘positive wealth effect.’ You could end up spending more than you should.
19 October 2021
Psychologist and author of The Secret Language of Money, David Krueger MD says we spend not according to how much money we have, or even what we need, but according to how we feel.
He says: “The positive wealth effect occurs when rising values of homes, stock portfolios, and retirement accounts make people feel wealthy.
“Even though no one takes a single dollar from these assets, the heightened mood leads to more spending.”
Downturns make us hoarders
And the opposite is true when the economy is tanking.
He says: “People feel the impact of the economic downturn in an inverse way: the ‘negative wealth effect’. Even though they make the same money at their same job, people spend less.”
He says neuro-economists have shown that fearful people cling to what they have. Our nervous systems constrict in a primitive effort for survival.
“In a state of withdrawal and fear, people reduce spending,” he says. “The condition that people seek to avoid becomes what they bring about.
“When fear is dominant, money may be not only constricted, but also hoarded. Finding some conscious, logical basis for their decisions so that they make sense, consumers become ‘risk-averse’ and hunker down. Spending gets a bad reputation.”
It’s all to do with our primitive brain, he says.
Good moods make us see possibilities
A University of Toronto study showed that when people are in a positive mood, their visual cortex takes in more information.
In a positive mood, they both see and process a greater number of possibilities in their environment. A good mood ‘enhances the size of the window of their perspective’.
But the study says there’s a ‘group emotional contagion’ or transfer of mood among people in a group. When we read the news or talk to friends, we pick up on others’ fear and anxiety.
This means how we feel about an economic downturn has the reverse effect from an expanding economy – even if it doesn’t have an impact on us.
How we justify spending
Money Mentalist Lynda Moore says there’s a lot more justification around spending after lockdown.
“A lot of Kiwis don’t feel we’re moving into a recession, they’re still thinking everything’s fine. It’s just a bit of an inconvenience.
“People are saying, ‘Oh, well, I’m not going overseas next year, so it doesn’t matter if I buy more Lego for my son’.
“They think these little spends here and there don’t count.”
But they do count, she says.
‘Little spends’ count
Moore says, instead of all the little spends, if you can’t have a holiday, or what you were planning, can you plan something else instead?
On the other side, some Kiwis have been affected more severely already and will be feeling the ‘negative wealth effect’ and being more cautious.
“It’s almost as if we’ve got two sectors of society that are going in two different directions right now.”
What can we do?
Faced with these feelings, what can you do?
Ask yourself, am I being overly positive, or overly negative – and is this affecting my spending?
When you’re about to spend, there’s an easy trick to try: the 10-second rule.
“It lets your logical brain catch up,” says Moore.
“Stop and make a 10-second assessment. Ask yourself, is it something I really want? Is it a good choice? Can I do it smarter? Can I do it better?”
For more about your mindset and how it affects your savings and investments, see the next issue of JUNO, on sale late November 2020.
JUNO’s content comes from sources that JUNO magazine considers accurate, but we do not guarantee its accuracy. Charts in JUNO are visually indicative, not exact. The content of JUNO is intended as general information only, and you use it at your own risk.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.