“ the ratchet effect.”
My nephew called up the other day very excited that he had received his first pay. I felt very proud to know that he had thought of saving up a small percentage from it. It got me thinking how a young boy who is living abroad amidst so much of distractions and attractions even thought of saving.
We keep hearing of people of all age groups, globally, who overspend. It amazes me constantly to observe such people who maintain a lifestyle where they keep up with the Joneses.
It is not the lack of financial planning skills. There is a psychology behind it. There are several factors:
1- could be lower self esteem/ over confidence/inferiority complex
2- I deserve it script- reinforced by parents who spoiled/pampered them while growing up.
3. Parenting style - poor role models
and numerous other factors. Their logical brain shuts down when the wealth signals light up. The animal brain tells that it is a matter of survival when it comes to money and comparing ourselves to those around us.
Subconsciously, they look those around for confirmation of social and economic status. Unconsciously they spend and feel good in the short term. What they have and what they spend is tangled up with their identity.
In the long term they suffer from bad loans, losing property and savings.
In Psychology we have the “ratchet effect.” It’s where people ramp up their spending over time and are psychologically not capable of scaling back their lifestyle.
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