- By Darren Smith
In our series of blogs targeted at what lessons we can pass on to our kids, there is one key principle that I believe is essential for everyone to understand and pass on. End of financial year sales are there to nudge us into emotional buying, whether we need something or not.
Lesson 1 – Recognise the nudge is happening and avoid it where possible.
The concept of nudge theory and how this is being used in sales is receiving increasing recognition in academia. Technology is making the nudge more targeted to our online activity which is making it even harder to resist for many. Nudge theory is all about giving us little prompts to encourage a behaviour – in this case, buying now.
Lesson 2 – It is not ours until we have paid it back.
Items we buy on credit are not ours and they will not be until we have paid them off. This is particularly the case where the loans are secured by the asset we have purchased or other assets provided as security. An example would be the car purchase where we take on a loan secured against the car.
There is a cost when we buy on credit, typically it is the interest cost that we pay either explicitly or implicitly where it is built into the price. But increasingly it is not just the tangible cost, it is the intangible and emotional cost connected to having increasing levels of debt. In fact there is increasing research and evidence on the impact of stress connected to our debt funded lifestyles.
Lesson 3 – Recognise that there is a cost to buying on credit and it is not just interest.
We can’t treat all debt funded assets the same as many do not increase in value the longer we hold them. Unlike the purchase of our family home where based on historical trends they tend to increase over time, purchases such as cars and TVs drop very quickly in value, however, we are still required to pay back the loan.
In a world of easy credit and a “we want it now” mentality, is the upgrade really worth it? As the buying public we are constantly being nudged to upgrade or take it now whether it is the latest electronic device, the holiday of our dreams or the bright shiny toy or car that we have always wanted.
I was reminded of this when I recently went into a JB Hi-Fi store around the June sales. I currently have a large screen TV which I enjoy with the family both watching movies and sport. I was bombarded with marketing messages and inducements to upgrade to the next bigger and better screen with the latest high definition technology and to add to the persuasion, there was 36 months interest free! How could I not… it was so easy. If I was connected to JB Hi-Fi online and did this search I would have been followed up with targeted ads on the bigger TVS. The good news is I have not upgraded!
My wife and I have a little ritual of prompters that we ask each other when we are making larger purchases. It doesn’t always work but it does help. Together, we run through the following:
- Are we in a position to pay cash now?
- Is it on our list of goals where we have a specific plan in place to purchase?
- Will it be cheaper in 12 months time to purchase?
- Wait for 48 hours and see if we feel the same
Emotional purchases are not new, but the emotional consequences of doing it on credit can be long lasting.
My last tip is to not let the perfume of the purchase outweigh the odour of the credit cost that you’re taking on at the moment of purchase. Save for the 70 inch TV and wait for it to be out for a couple of years.
Our behaviours have a significant impact on our ability to manage our money and get ahead. I believe this is one of the key value points of having a financial coach that can position themselves between you and the emotional buys/actions that you will regret shortly after the purchase.
If you see value in the above article please feel free to share it with those that you love or believe will benefit from reading. If you have any thoughts on the nudge theory please also feel free to share these.