Impact of Incentives on Personal Financial Decisions

Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

Spending on the things we want makes us happy. Saving for the things we need makes us feel responsible. Investing for the future makes us feel secure. In this lesson, we will explore how all three actions are often motivated by our emotions.

Personal Financial Decisions

The day after college graduation your friend buys a modest condo. It wasn't particularly expensive but it was a cash deal! How did he do it? Where did he get the money? He probably made sound personal financial decisions throughout his life, like working and saving through high school and college. These are decisions about how much money to save, spend and invest.

The concept sounds easy. Save more than you spend and you're in good shape. Spend more than you save and you're in trouble. That means you may not have the resources for the things you want. For some, this means holding off on purchases until money is available. Or going into debt.

There are three areas of personal finance to balance. Earnings are the money you make working, selling things or even a birthday check from grandma. Spending is giving up what you earn in exchange for the stuff you want or need, like food, clothes or entertainment. Saving is socking away earnings for use at a later time.

Let's factor in investing your money in the stock market or a 401K through your employer. This is a long-term financial option that pays dividends in the future. You can buy stock in a company, contribute to your retirement fund at work, or even buy real estate. If all goes well, you will increase your initial investment over time.

This sounds pretty simple, but not everyone can juggle this trio. Some people control their spending by minimizing earnings. A low paying job does this. Others may have a nice income, but budget only as much as they need to satisfy the basics like housing, food, and transportation. The rest goes directly into the bank. Others yet may have the income, but overindulge in the things they enjoy like going out to dinner, vacations and fancy cars.

How People Feel About Saving

Everyone wants to be financially independent. You don't have to be a millionaire to have financial freedom. It can come from simply having money in the bank for a rainy day. Saving more than you spend will do this for you. Financial independence is having enough money to cover living expenses for a long time, without having to work. For most, it is a feeling of power and freedom. People who have enough money in the bank report feeling:

  • Less stress
  • Fewer health issues
  • Less anxiety over losing a job
  • Increased confidence

Not a good saver? Here are a few tips on how to become a better one.

  • Open a savings account as soon as you can. The sooner you commit, the more money you can save over time.
  • Earmark a percentage of your weekly pay to savings. It doesn't have to be a high percentage. But pledge an amount you can afford to do without.
  • Write down specific financial goals, like having $5,000 saved up by next September. You are more likely to stick to the plan if you write it down.
  • Make a budget you can live with. Keep expenses down but treat yourself to something every now and again.
  • Pay down your debt. After your debt is gone, send the money you would have used for the debt to your savings account.

Once you get into the habit of saving, you will feel very responsible and good about yourself for doing it.

How Does Spending Make Us Feel?

When we see a red tag clearance sale, we often buy everything we see. Why? It may not be available again at that price. It doesn't matter whether you need Halloween candy in November or a Christmas stocking in January. It's there! It's on sale! That's the hunter/gatherer mentality and it goes back to when cavemen walked the earth. They gathered things just in case they needed them someday.

Thinking like that gets people in deep debt. However, spending does do us some good. When we spend money, we feel:

  • Empowered
  • In control of our money
  • Gives us happy feelings
  • Satisfies our hunter/gatherer instinct to survive

The question is, do things really make us happy? A new pair of shoes may temporarily make us happy, but it only lasts a short while. However, we continue to spend even if the joy is brief. And the more we make, the more we spend. With a larger salary, one may take up a new hobby like golf. Golf requires expensive equipment. People who play golf may engage in more expensive leisure activities like lunch and drinks at the 19th hole.

That's not to say that we should squirrel every penny away. Moderation is the key. Here are a few ways to be more conscious of your spending:

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 160 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create An Account