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Six Financial Habits Worth Noting

An interesting study in financial behavior, or Behaviorology, shows that people often repeat their financial behavior in a highly predictable manner based on the state of the economy. The study, conducted by Dr. Dan Geller — a behavioral finance scientist and the author of Money Anxiety —  found that people repeated their financial behavior in each of the economic cycles during the last 50 years. 

According to Geller, people orient themselves to the state of the economy by repeating 6 financial-behavior patterns — 3 related to their spending and 3 related to their savings. Each financial behavior pattern corresponds to the stage in the economic cycle, i.e. recession, recovery, expansion and decline. Here are the 6 financial habits:

Castle Craze
As soon as the economy improves and starts to expand, people return to their favorite "sport" — bigger and better homes. The Castle Craze financial behavior is about people's fascination with the status symbol associated with success. The craze is not just for practical consideration such as having a place to live or for investment reasons, but also as a statement of status and achievement. In good economic times, people will over extend their finances just to win in the bigger, better and nicer national competition.

Durable Diet
People go on a Durable Diet when the economy is in a recession and they want to save money by prolong the life of their most expensive possessions — automobiles and appliances. Typically, people will hold off on replacing such durable items until the economy improves, or until the item breaks down and must be replaced. The reason car sales have increased dramatically in the last couple of years is exactly because during the recession many people postponed replacing their cars, as they would normally do.

Tiny Treats
People turn to Tiny Treats when they can't treat themselves with what they really want — expensive items. When the economy is transitioning, people are unsure if they should buy a new big-screen TV or put the money aside in case things don't get better economically. Tiny Treats are little compensations for giving up on the big things they are not buying. During the last recession, the only category that exhibited high growth in sales was personal-care products and services. These are items such as beauty and body treatments that are relatively inexpensive but make people feel good.

Power Play
The Power Play behavioral orientation occurs during the two transitional economic stages — recovery and decline. When the economy is in transition, people are not sure what to do with their money — spend it or save it for a rainy day. This is a power play between the urge to spend and the instinct to save. Once the economy improves and expands, spending wins, and when the economy transitions to a recession, savings wins in the power play.

Rate Race
The Rate Race begins as soon as the economy starts expanding, and people are beginning to chase after the highest interest rate or best return on their money. Since financial confidence increases during economic expansion, people are willing to take greater financial risks. Thus, people divert more of their money from bank savings to the equity market where rates of return are much higher and so is the risk. 

Mattress Money
Mattress Money is our most basic behavioral orientation in response to economic downturn and looming recession. It stems from our instinct for self-preservation and survival. When people feel financial danger due to economic downturn, they start hoarding money by shifting their bank deposits to liquid accounts that can be immediately withdrawn. Today, $8 of every $10 in bank savings is in Mattress Money, compared to only $6 prior during the last recession.

According to Dr. Dan Geller, "If you want to know what people will do with their money when the economy improves, just look at what they have always done — get in the Rate Race and Castle Craze. Similarly, when there is a slow-down in the economy, people will go back to Mattress Money and the Durable Diet."