Morningstar’s behavioural economist Sarah Newcomb chats with ‘Her Money’ host Jean Chatzky.
According to Newcomb, we all make unconscious decisions due to unexamined stories we are telling ourselves. Some are true, some are not. Some are healthy, some are not.
For instance, she cites the myth that one needs to know the difference between a want and a need. It appears to be timeless advice which, on the surface, appears true. Hence we don’t question it.
Unfortunately, it allows for a mindset of scarcity. If you don’t need it for survival, you can easily do without it. It sets us up to feel deprived. If you are judging what you can and cannot have by what you need to survive you are basically stating: “the act of budgeting is going to leave me emotionally unfulfilled.” The act of budgeting then feels like a recipe that makes one unsatisfied.
There is a simple shift of perspective we can make that changes this unhealthy scarcity mindset of wants and needs.
According to Newcomb, instead of categorizing a want and a need, we need to understand the difference between a need and a strategy for meeting that need. Our needs are deep and fundamental and universal. For example, we all need transportation. But there are different strategies for meeting that need (car, bus, train, bike, walk, cycle) and each has a price tag.
Our emotional needs matter too and psychology gives great insights into retail therapy. Because we incorporate the things we own into the sense of who we are. Our brains sense of identity extends beyond our body and personality to our society and our possessions. Hence, when we experience rejection or loss or our sense of identity has been eroded, we restore ourselves by buying something that represents our personality.
Newcomb explains how beauty is a need for her. Our needs are fundamental. They don’t go away. They only get louder if not met. But the strategy in which we meet them is where flexibility comes in.
So instead of a budget being a diet where you are just trying to get the numbers to balance, so that you have enough in savings to meet your need for security, you are instead looking at a plan and saying how can I meet all these needs (physical and emotional) with the resources that I have? And you become creative in the strategies that you use.
The takeaway: Have the courage to be mindful about your financial choices and to think as deeply as you do about other decisions.
You can listen to the complete conversation between Sarah Newcomb and Jean Chatzky here.
Sarah Newcomb will be attending the Morningstar Investment Conference on October 18-19, 2016 in Mumbai. You can read about her presentation and workshop agenda here.
