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To splash or to stash - when to spend or save your cash

Jono Culibao

You’re prodded awake, late on a Sunday morning, by the harsh rays of light that have forced their way past your blinds and into your room. After you take a few seconds to realise where you are, your next instinct is to reach for your phone. You flick through messages while the memories slowly start to trickle in from last night. These memories are confirmed as you open up your banking app to see a list of recent transactions longer than your list of regrets.

Does this sound familiar? 

Admittedly, it may have been a while since we’ve all had a proper night out (pre-COVID-19 style). But the point remains the same. Even when not inspired by a big night out, there is a universal human preference for immediate over delayed gratification (something econs refer to as ‘time preference’). This can cause our future selves big problems if we do this excessively, but can also lead to a mundane life if we never choose to enjoy ourselves in the present. 

Full-time work gives access to a whole new world of spending, but also to a slippery slope of purchases that you may regret in the long run. How do you find the right balance to splash for your own enjoyment and stash for your future benefit? In this topic we’ll cover:

  • A framework to find that perfect middle ground
  • Key actions to keep you on track

Using science to help us find that perfect middle ground



In the past few years, I have found some information scattered around the fields of psychology and behavioural economics that can be used to help find this balance. Two key focus areas in these fields that can help build a framework on this subject are: 

  1. What people really derive happiness and life satisfaction from, and 
  2. Irrational human behaviours that can lead to outcomes that are not in our best interest

By putting some findings from these two areas together, one can understand where to adjust their behaviours to better serve themselves. In this article, I will highlight a few key ideas from these fields and also provide some ideas on how you can change your behaviour to maximise the return you get from each dollar you spend.

Recommendations - Alright Houston, what’s the solution?

Idea 1: Not having a goal in mind

Philosopher Henry David Thoreau once said ‘In the long run, people hit only what they aim at.’ Very rarely do the successful become so by chance or with no prior conviction. Luck can certainly play a part, but in most cases an intelligent individual will place their money on the boxer with the monomaniacal work ethic over their lazy opponent who is counting on the one lucky shot.

Similarly, when it comes to financial goals, you are more likely to save for the future and curb your spending if you have a specific goal in mind. In fact, some experiments have shown that when presented with a small present reward and a larger future reward, individuals who proactively think of what they can buy with the larger sum are more likely to choose that over the immediate reward. If you have a goal, be it a holiday, car or even an early retirement, simply visualising that goal on a frequent enough basis will provide some assistance in preventing impulse buying.

Idea 2: Failing to understand the adaptation principle

A famous study done in 1978 found that within a year, individuals that had won the lottery and people who had become paraplegics both returned most of the way back to their original ‘baseline’ happiness level. Psychologist Jonathan Haidt refers to this as the ‘adaptation principle’ in his book ‘The Happiness Hypothesis,’ which implies that most people adapt very quickly to their circumstances. But does this mean there is no need to pursue anything, because we will neither be happier or sadder? 

Not necessarily. 

Apparently people only adapt to ‘things’ very quickly. A study by psychologists Leaf Van Boven and Thomas Gilovich demonstrated that most people are happier when remembering times where they spent money on experiences rather than objects. This was deduced to be because most experiences are done with people, whereas material purchases are often made to impress people. The idea of spending money irrationally to impress others (called conspicuous consumption) can be a wasteful drain on your savings.

Idea 3: Not remembering that a dollar is a dollar is a dollar

The final idea I’ll discuss is the concept of ‘mental accounting.’ This theory suggests that often people don’t view all money equally, instead acting differently to pots of money based on its origin and intended use. For example, many people will use their tax return to purchase lavish items they would otherwise not buy. Or, people may be willing to spend exorbitant amounts from a ‘holiday fund’ by eating exclusively at fancy restaurants while on holiday, which they saved for by eating frozen dinners at home for the past year.

The more rational way of treating money is to be conscious that every dollar you have is ‘fungible’, which means it is completely interchangeable with every other dollar coming in and going out. A good way to internalise this when spending your money is to think about what else you can purchase with that same amount. If you are about to spend your entire tax return on an expensive whisky, think instead of how much closer it can get you to the new motorbike you have been saving up for over the past year.

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Let’s wrap it up mission control

Whilst an enormous amount of thought is put into making money, people simply don’t put the same effort into figuring out the best ways of spending their money (though this may have changed post-coronavirus). By understanding what type of spending maximises happiness and life satisfaction, while addressing any irrational behaviours that prevent these goals from being achieved, you can master the delicate tightrope that hangs between being a frugal miser and making it rain.

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