The following blog post was submitted by Nathaniel Berman of SheBudgets
According to new research from Michaela Pagel, an assistant professor at Columbia Business School, and Arna Vardardottir of Copenhagen Business School, individuals across the income spectrum spend more on discretionary goods — things like clothes, entertainment, and fast-food meals — on days they get paid.
By studying electronic payments made by consumers, the researchers found that more than half of the population increases their spending on paydays by over 25 percent, even after controlling for individual, day of the week, and day of the month fixed effects, which capture things like after work drinks with colleagues and increased spending around holidays. Individuals are more likely to go shopping and, once they’re out, to spend more than they normally would — a double whammy for the pocketbook.
“According to standard economic theory, people make financial plans and budgets, but our research shows that people don’t behave consistent with theory, especially on the day they receive their paycheck,” explains Pagel. The findings are based on studying five years of purchasing data (2011–2015) from Iceland.
If you find yourself to be one of these people (and it’s likely you’ve been there at some point) you might be in the unfortunate position of having a dwindling bank account. And if you are constantly fighting the urge but losing to it on payday, then you might need some advice on how to stop spending on the day you get paid. It’s one thing to go have a celebratory drink with your co-workers on the day you receive your paycheck. It’s another if you’re out there hitting up every single store in town to “take advantage” of all the latest sales. With that in mind we’ve come up with some strategies that will help you combat the urge to spend on that special day: payday.
Break the payday itself
This one is a tough one to pull off but some employers enable you to change the day you get paid. Most pay on the 1st and 15th of the month but have you actually gone into accounting and asked them to change the day of your paycheck? Instead of asking them for a specific day (which demeans the point) ask your employer to make your paid days random. If you don’t know the day you get paid you are psychologically backed into a corner. What feels like being backed into a corner will actually be something that liberates you. If you don’t know the day you get paid then you are mentally in the position of needing to save. Instead of knowing a sale is taking place on the 15th of the month, you will constantly recognize that you need to have money at all times, for all occasions, and for all things, instead of just the 1st and 15th of the month. However, what if your employer doesn’t allow this?” What if you are self employed and all your clients pay you on the same day? Then this might not work. And besides, having these strategies at your disposal will compliment any “forced” methods you use to save money.
Embrace the budget
An article I read back in 2014 on Get Rich Slowly still sits with me today. Most people think of budgeting as some sort of taboo exercise. Oh no! The “B” word. It’s made out to be this gigantic undertaking that so many people feel daunted to try. The truth is that budgeting isn’t hard at all. It’s the discipline on following through with a budget that is challenging.
Putting together a plan is crucial to managing your spending better. Figure out how much you must spend on necessities like food, shelter, utilities, and transportation to work. Then set up limits for discretionary spending on items like entertainment, dining out, or cable TV. No matter how you break up the categories, the overall amount you spend each month should be less than what you earn. If you are spending more than your income, you may be on a dangerous path and have the potential to run into financial hardship.
One thing I can assure you of is this. If you are sticking to a budget, when payday comes, think about your budget. Your urge to run off and get a $1,000 watch will lessen considerably if you know that this $1,000 isn’t surplus cash. Remember, if you fall below that budget, it’s not allowed. If you DO have a surplus? Congrats! I would personally stash it away in an index fund but if you want to reward yourself, as long as you have 6 months of savings put away and aren’t in any kind of credit debt, have fun! But remember, you HAVE to bring in more than you spend.
Find alternative and free activities on payday
If you know it’s payday why not reward yourself with something that doesn’t cost money? How about playing a sport? How about going to the gym? How about taking in a museum? Maybe you can take a walk? How about listening to some victory music? Seriously, be happy that you made money from the work you put in that week but don’t spend it. I can promise you this. Spending that money isn’t going to do much for you in the long term.
Limit your spend to a specific number
Let’s just say that you refuse to give up on spending on payday. It’s understandable. I get it. I’ve been there. But what if you had a dollar limit of say $20? You’re allowed to indulge in anything you want but it has to be under $20. Do you have any idea how many things you can do for under $20? No? Here’s a list of 20 meals you can get for under $20. Ever shop at the dollar store? Get 20 fun little toys for yourself. Seriously. Anything as long as it’s under $20. Ever go to a casino and promise yourself you don’t want to throw away more than $100? When you inevitably lose $100 do you take out more money or stop? I can guarantee you when you’ve had the discipline to stop you’ve had a much better time. In fact it was a “fun” time. Whenever you go over your limit though, you feel empty inside. Same principle here.
Investopedia says to take steps to intentionally limit your exposure to advertising.
The less you are aware of what’s available for you to buy, the less likely you are to develop a sudden “need” for that item. Unsubscribe to the product catalogs that arrive in your mailbox and the promotional emails your favorite stores are always sending you. To further avoid internet advertising, download a program that blocks ads and prevents them from appearing on your screen.
I couldn’t agree more with this. The less you see the less tempted you’ll be to purchase.
Know your consequences
Does being accountable directly correlate to your psychological money urges? No. Frankly I can’t stand when people always say “be accountable.” You can’t just be accountable on a whim. It takes time. What you can do however, is try to remember how you feel when you’ve spent a ton of money and find yourself in the hole until your next pay check. Try to hold on to that feeling. Not only that. See what it feels like when you actually have a plan and stick to it. Try to embrace and remember that feeling as well. You don’t have to punish yourself or write things on your refrigerator. Ultimately you know yourself better than any reminder or note that you write yourself. It’s not hard to remember a time when you spent a ton of money and it left you in a ditch. Your best bet is to channel these times and know what to avoid but also know what to want to feel. We all want to feel proud of ourselves for sticking to what we said we would. Give it a few weeks. Stick to it. It may very well become addicting, but in a good way.
So that’s really it. But this is all much easier said than done. Keep these in mind for review.
Stick to a budget — religiously — you don’t do this and you shouldn’t even bother starting.
Find better and cheaper activities than shopping — this isn’t hard, just allow yourself to do it.
If you must spend, limit it to $20.
Avoid advertising and all types of places that tempt you to spend.
8 thoughts on “How to Fight the Psychological Urge to Spend on Payday”
In our family, we more or less have reached the point were payday is a non event. It is the day money hits the account for further automated transfer to other accounts. I guess that is the advantage of having the budget part of the spending habit.
We have no urge to spend on payday. It is just a day like any other. Happy to have reached that state of mind!
ambertree recently posted…how we foresee cash for future plans
I agree with Ambertree. My money gets filtered out by my employer before I see it. I send allocated amounts to savings, brokerage accounts, etc. So my paycheck never really goes up. This forces me to not splurge because the money I have allocated from my paycheck barely covers my bills.
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Good advice Nathaniel. We only use a debit account/card, so we’re motivated to reduce that as little as possible. We have an annual budget, broken down into months, so we know how much we’re getting as income and planning to spend (plus we have an emergency fund for unplanned emergencies). We deliberately budget in a bit of fun/luxury/splurge so that we’re not depriving ourselves, we know fun time is coming soon and we don’t break our financial discipline.
Like ATL and IH, we save a certain amount a month and also transfer any leftovers after the month (rather than spend it) so we’re double saving (and then investing).
Dividendsdownunder recently posted…Should we get Private Health Insurance?
That interesting that the number of people that spend on payday is so high! I barely know when I get paid. I think all the comments are on point with your message of a budget. I use Mint to track my budget and then whatever is left in my bank account above $2,000 (emergency fund) goes directly into my Dividend Portfolio.
Ha ha ha not sure about asking your employer to”randomize” your paycheck date, but I think you’re definitely on point about budgeting. =)
Wallet Squirrel recently posted…How to make money buying for other people
“To further avoid internet advertising, download a program that blocks ads and prevents them from appearing on your screen.”
Dammit, Nathaniel! How are our blogs supposed to make any money!?
But this stuff is absolutely right, though. Making that money is all for nothing if you spend it on useless stuff literally the day you get it.
One thing I would recommend is to open an account with an online bank and have the bulk of your paycheck go to a savings account with them. It’s liquid (it’s a regular savings account), but with no money and no debit card, you wouldn’t be able to access that money on a whim while at the mall. Don’t worry; these banks are FDIC insured. At the risk of shamelessly plugging my blog, I did write about this topic more in depth here: http://www.angryretailbanker.com/2015/09/11/why-you-should-have-an-account-with-an-online-bank/
I’ve never heard of employers “randomizing” your pay date. Somehow, I don’t think that would ever work.
ARB–Angry Retail Banker
ARB recently posted…What Is A Mortgage, Really, And How Do I Get One?
I think employers would ‘randomise’ the pay date to be as late as possible..