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Key points
- Tracking your financial spending can help you stay on top of your finances.
- Knowing exactly how much you spend on what can have unexpected emotional side effects, known as "pain of paying."
- When purchased items are closely coupled with their costs, consumers experience an emotional toll, meaning they enjoy their purchase less.
Aren’t we all feeling the pinch of rising energy bills? That "oh-no" moment when receiving a heating bill makes us question our house's optimal temperature. Maybe you have even considered joining the recent trend of "thermal tourism," which involves taking winter holidays in warmer climates to avoid the cost-of-living crisis.
It is hardly a coincidence that smart meters have reached unprecedented popularity. By showing consumers how much energy they use at any given moment (and just how much they’re paying for it), smart meters have been advertised as an obvious solution to help people understand their energy bills, adjust their behaviour and take control of their spending. For example, smart meters could help you get your money’s worth by highlighting appliances that use particularly large amounts of electricity. Reducing the use of those appliances and switching to alternative options could help you save significantly!
The Psychology of Paying
Tracking your spending habits—be it through smart meters or detailed bookkeeping—seems like an obvious solution to tackle overspending and make you feel better about your finances. But is that really the case?
One commonly overlooked factor is the psychological complexity of any payment we make. When we part with our hard-earned money, the actual financial cost isn’t the only thing that matters. Indeed, psychologist Dan Ariely argues that consumer experiences are shaped by additional factors, including the hassle of making a payment and the subjective pain of paying.
- The hassle of making a payment refers to the effort associated with making a purchase and typically involves considering the payment method. For example, paying with cash may be perceived as more cumbersome than using contact-free card payments. This is because it requires customers to carry a wallet, count out notes and coins, and ensure they receive the right amount of change. Surely a simple credit card scan is a lot less hassle?
- The pain of paying refers to a ‘moral tax’ or emotional side effects that come with each payment we make. It refers to the guilt experienced when spending money or how we feel about our purchase after having parted with our cash. The pain of paying is often influenced by the timing of a purchase. For example, many consumers experience a greater pain of spending if a purchase is made at the end of the month and happens to deplete their monthly budget, a phenomenon referred to as "bottom-dollar-effect."
A related aspect is the "coupling" of payment with the receipt of the purchased item or service. A somewhat abstract concept, ‘coupling’ describes the degree to which consumers link a given purchase to its costs. When there is a strong link, costs appear particularly salient, leading to greater emotional pain and potentially less enjoyment of the purchase. As an example, consider two different ways of paying for your holiday. You can choose between paying an all-inclusive, one-off price three months in advance or paying separately for each service received on holiday. The second option will likely result in a stronger coupling of costs and purchases, thus inducing more pain of paying and dampening your overall enjoyment.
The Pain of Tracking Your Spending
The previous section highlighted the importance of psychological factors when making financial decisions. It’s not just the final price tag that counts: How we make a payment often appears to matter just as much! Let’s apply these insights to our initial example of smart meters to track energy spending.
While smart meters offer a simple way to keep on top of your finances and also cut out the hassle of regular meter readings, it’s important to consider the pain of paying associated with switching to the "smarter" system. Let me share an anecdote from my personal experience. In a recent post, I wrote about the difficult decision of getting solar panels. As part of the decision process, my husband and I got a smart meter to track energy use more efficiently and make predictions about future energy expenditures. Our smart meter received a prominent position on our kitchen counter, allowing us to glance over our real-time spending every time we walked past. Soon, this turned into a slightly worrying obsession on my part. Whenever I used the toaster, switched on the kettle, or even opened the fridge door, I’d rush to check the change to our meter readings.
The availability of accurate, real-time data via our smart meter display increased the coupling of energy consumption with its costs. As a result, I soon felt guilty about my wish for dry clothes or a comforting cup of tea. And while my awareness of different appliances’ energy use may have helped me save some pennies, the emotional toll seemed to soon outweigh the financial benefits. After all, who wants to feel bad about the simple pleasure of a hot beverage?
Should you dump your smart meter?
The problem with smart meters and other financial tracking devices is the constant salience of costs. On the one hand, this can help consumers make more prudent choices. On the other hand, it may incur a powerful emotional tax, making us feel miserable about every purchase. But what does this mean for the overall utility of smart meters? Should we stop tracking all expenditures and live in blissful ignorance until the arrival of our next bill?
As with most things, finding a healthy balance will likely be key to managing your finances. Knowing your numbers and identifying sources of regular overspending is certainly to be applauded. Yet, this needs to be balanced with an awareness of the psychological aspects associated with payments. To tackle the pain of paying, simple behavioural adjustments can go a long way. One example might involve positioning your smart meter in a less salient location. Moving the device from your kitchen counter to a hidden hallway spot could be a helpful first step. This would allow for regular spending checks while cutting out the constant, painful reminders of your spending.
What changes will you make to manage the emotional toll of getting your money’s worth?
