When it comes to our spending habits, everyone is unique. But what if there was a way to better understand why you’re more likely to be someone who saves every month, or someone who would rather splurge on a luxury holiday? And what if through a better understanding of ourselves, we could make better financial decisions?
For Adam Gottlich, Head of Behavioural Science and Wealth at Standard Bank South Africa, our spending habits are often manifestations of our different personalities, not to mention our cognitive biases that can negatively affect our decision making — and many studies have proven this.
“For example, people who are more open to experience tend to spend more on flights than those with less of this trait. Those who are more extraverted tend to spend more on dining out and those who are more conscientious tend to put more money into savings and people. The way we spend is often reflective of who we are as people,” says Gottlich.
But our personal biases are also a key factor in our financial behaviour. For many South Africans, we suffer from “present bias”. Present bias is the tendency to rather settle for smaller, daily gratifications than to wait for a larger, future reward.
“When we think about our future selves, our neurological reaction is the same as if we were thinking about someone else. Understood from that lens, saving for the future is the neurological equivalent of giving money away to someone else entirely. To overcome this, we need to be cognisant about our future — what we want and who we want to be,” says Gottlich.
Gottlich’s six financial archetypes are key to Liberty to continuously understand how people behave in order to create more effective financial solutions and appropriately advise on an ongoing basis.
While not everyone can fit perfectly into an archetype box, Gottlich explains: “Archetypes describe ‘where you are’ now as opposed to ‘who you are’ in order to help us understand and become aware of our behaviours and some of the unconscious biases that may be negatively affecting our lives through the choices we make. Archetypes can help us by showing us where we have opportunities for growth and personal development.”
Liberty’s Certified Financial Adviser Maxine Muller agrees that unless one understands ones’ future needs, the journey to financial freedom can be a long and winding road, but she has some advice for each of them to make the trek a bit easier.
The Big Spender:
You live for the now, but sometimes your credit card just can’t handle it! Seeking pleasurable experiences is the top priority for the Big Spender, meaning they’re always fun to be around, but sometimes that impulsiveness can come back to bite you and place you in debt.
“For the Big Spender, scenario planning is the best way to make sure they don’t end up in serious debt. You have to show them that financial planning can be fun! You can go on that amazing holiday, you just have to save for a bit and there won’t be any guilt afterwards. It’s also a good way to plan how to pay off existing debt,” says Muller. She believes the Big Spender should try and establish an emergency fund, of a few months of salary, so that if there is a major impulse purchase, they can still afford the essentials. “At the very least, this type of person should consider income protection, so that they can maintain their lifestyle in case of an emergency,” she says.
You’re careful, you’re always prepared for the end of the world and you’re rarely in debt. But sometimes you overthink before making big financial decisions and feel paralysed because you’re worrying about the worst-case scenario. Don’t be ruled by fear!
“As Financial Advisers, we all have clients like this. We have to go through every scenario before they’re willing to make the financial decisions that will improve their lives — and then sometimes they still won’t take the plunge,” says Muller. For the Analyst, it’s important to understand that not all debt is bad debt, she explains, and that putting money into assets is better than having it just sit in a bank where it can depreciate. Having liquid capital is important for the Analyst to ensure they feel secure, says Muller, and reaffirming their decisions is key in allowing them to be freer with their finances.
For the Socialite, spending money is all about recognition and increasing self-esteem, meaning you often lead with style and grace. However, keeping up with the Joneses (or in your case, the Kardashians) can make the Socialite come across as pretentious and even lead to bad spending habits.
“For the Socialite, they’re often willing to invest to improve their social standing, which is why we often have to show them plans with all the bells and whistles,” says Muller. But it’s important that they don’t cross the line into overspending on big purchases, she says, and she insists that they try and stick to the golden ratio of spending: 50% of what you earn goes to your needs, 30% to your wants and 20% into savings. “Balance is also important for the Socialite, so putting the right spending structures in place, with enough liquid savings, will help them maintain their lifestyle,” says Muller.
You might be struggling to make ends meet, you hate to balance your books, but goodness you can hustle. You’re hopeful and adaptable, but sometimes you’re shy when it comes to figuring out your finances and you can even feel helpless when it comes to money. But there’s still so much potential!
“Many Newbies don’t realise that they’re actually in a really good position. They’re usually young, which means that if they start saving now, they’ll have much more than someone who starts saving in their 30s and 40s,” says Muller. When she whips out a compound interest calculator, Muller says that the Newbies may not be super interested, but they need to realise the magnitude at which their investments will grow. They’re also usually pretty healthy, which is why health and life insurance premiums will start off very low, so that if their physical or mental health starts to suffer, they’re better protected than their older counterparts. “Your youthfulness and adaptability means you can do really well, you just need that push in the right direction,” she says.
You’re spending lots on friends and family, because you’re a generous and empathetic person. But sometimes you’re enabling other people’s bad behaviour and you’re sacrificing your own self-care. It’s time to focus on you!
“What the Giver sometimes doesn’t realise is that they’re actually a different version of one of the ‘spender’ archetypes. They may be helping other people, but they’re not necessarily seeing the benefits of a lot of their spending,” says Muller. For Muller, many women often end up in this role, simply because they’re expected to maintain their families and communities, or at least more so than their male counterparts. So it’s important to ensure that Givers start to fill their own cups, whether it means more insurance protection to make them feel secure or that they spend more of their money on self-care and less on others. “Of course, we always make sure that they have some liquid investments so that they can still assist the people around them in need, but an emergency fund just for themselves is also really important,” says Muller.
The Practical One:
Independence and being totally self-sufficient is what gives life to the Practical One, and you’re saving and saving. But you can be obsessive when it comes to money, and you might be hoarding instead of making the right investments for your future. Try and relax, you’re okay!
“We always acknowledge and praise people for being disciplined when it comes to saving, but it’s also okay to live a little,” says Muller. Money is there to provide stability, she explains, but it’s okay to also spend it to improve your lifestyle and even have some fun. “The Practical One often has a fear of ‘not having’, which might be because of a background of poverty or trauma, but we do our best to convince them that it’s alright to take the occasional riskier financial decision if it means real benefits later,” she says.
Regardless of where you fit among these archetypes, and with the Covid-19 pandemic having upended many financial plans, you can take a five-minute assessment through Liberty’s quick connect to receive a personalised report which shows how well your money is holding up and to connect with a Financial Adviser.
This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The material has been created for information purpose only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented. Please consult your financial adviser should you require advice of a financial nature and/or intermediary services.
Liberty Group Limited is a Licensed Insurer and an Authorised Financial Services Provider (no 2409).