With holiday shopping just around the corner and countless "sales" and "limited-time deals" flooding our inboxes, it's important to acknowledge how those deals may be influencing our decisions.
Past research finds that we tend to spend more when shopping with a coupon. This may sound counterintuitive--after all, how can one spend more with an extra $10 off coupon? But the reasoning behind this behavior comes down to mental accounting.
Mental Accounting: Not All Money Is the Same
Logically speaking, a $10 coupon shouldn't impact our spending decisions because it doesn't have an impact on our overall lifetime wealth. However, research finds that a coupon tends to lead people to spend more. Why? Because we tend to create mental accounts to categorize our financial resources. According to the theory of mental accounting, instead of viewing money as completely interchangeable, we see money differently based on its origin or how we plan to spend it.
These mental accounts can be a good thing. For example, labeling a sum of money as "rent" can help us remember to earmark it for that expense and not spend it on something frivolous. But at the same time, these mental accounts prevent us from seeing the full picture of our financial resources.
Imagine you created a great budget in preparation for holiday shopping, where each person on your list is allocated a certain amount of money and the rest is set aside for regular monthly bills. Given the cost of these gifts--which aren't a standard part of your monthly budget--your budget is tight but manageable.
On your way to begin shopping, you receive a notification of a great coupon for one of the stores you were planning to shop at.
Because of mental accounting, most of us would see that coupon as free extra money to use at that store and place it into that specific mental account. However, what we should do is consider our whole budget and realize that we could (and probably should) put the money that coupon helps us save toward monthly bills.
And this, in a nutshell, is how mental accounting could lead us to the wrong conclusions and actions.
Money Habits to Combat Mental Accounting Pitfalls
You don't have to swear off coupons to avoid mental accounting mistakes. Simply adopting a few strong money habits can help you take advantage of coupons without breaking your budget:
- Be aware of mental accounting tendencies. It's OK to get excited about a new coupon in your inbox, but try to reframe that excitement. Instead of thinking of it as free money to use on your next purchase at that store, try to view it as money that is now available to put toward any category in your budge--including savings!
- Use mental accounting to your advantage. Another money habit is to create a mental account for any "free money" you receive in a month. For example, maybe you decide that any money you save by using coupons will go straight to your savings account. Just make sure you plan this process out before you receive or use any coupons. (It may be harder to practice self-control otherwise!)
- If in doubt, unsubscribe. If you notice that you can't seem to control your spending decisions after receiving promo emails, it's OK to unsubscribe. Sometimes the best way for us to control our own behaviors is by changing our environment. In this case, you can change your environment by preventing the temptation in the first place.
"Limited time deals" and "20% off" coupons can be great, but they can also be dangerous. Because of the way our minds organize our financial resources into mental accounts, these coupons may actually prompt us to spend more--but they don't have to.
Adopting a few new money habits may help you avoid overspending when you come across Black Friday deals.