Overspending is quicksand to small business owners – not only is it impossible to escape once you’re in the cycle of overspending, it also swallows you whole! Most people don’t set out to overspend – rather overspending stems from emotional spending, which is why it’s SO important to understand and identify emotional spending.
I’m going to rock your world because we’re talking about the difference between buying when you need something and spending money due to an emotional reaction. I’m teaching you how to tell the difference between spending emotionally and when you’re spending money on something that you need.
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Spending Out of Need (3:46)
Spending out of need is spending rooted in a legitimate business need. That’s buying something that’s going to impact and benefit your business. For example, you’re hosting a workshop and you buy pens, a paper, art supplies, and refreshments. If you’re running a workshop and say refreshments will be provided, then you need to buy those refreshments.
Let’s talk about an example that is not a legitimate need.
You’re hosting this workshop and purchase a new outfit because you don’t like the clothes you already own. Well, that’s not a legitimate need because there’s an emotional aspect to it. Will this outfit truly help your business grow and expand? OR Are you buying an outfit because you have an emotional need that a new outfit is going to fulfill?
Hierarchy of Need (5:43)
It can be super confusing to understand what is truly a need because not all needs are created equal.
That’s where the hierarchy of needs come in. Some things you need more, and some things you need less. Here’s are the different types of needs for your business:
Essential Needs: Items absolutely necessary for the operation of your biz.
This is something you purchase that’s absolutely necessary for you to operate your business. Examples of essential needs are website hosting, securing a domain name, and software. As a bookkeeper, one of my essential needs is Quickbooks Online. I must have that software to perform my services. For a photographer, it would be a DSLR camera and a Photoshop subscription.
Non-Essential Needs: Items that make operating your biz significantly easier but you can go without.
These are purchases that make operating your business WAY easier, but you can still operate your business without them. Common examples are software like social media schedulers and CRM software. Adding team members is also a non-essential. While it’s super enticing to hire a virtual assistant, you *could* make do without one.
While you could have a business without these things, it would be much more difficult. Non-essential items improve the efficiency of your business plus the efficiency of your time as the business owner.
Nice to Have: Items that improve your business but don’t directly impact its operation.
These are purchases that improve your business but don’t directly impact its operation. This one is the fuzziest when it comes to need vs. emotional spending because we justify these spending sprees.
Nice to haves have an indirect benefit to your business. Examples of nice to haves are books and online courses, both of which stand to benefit your business but will not make or break it. (pssst- check out this post that talks about how you can determine if you should purchase an online course or not.)
Not Needed: Items that don’t directly or indirectly impact your business.
These are purchases you don’t use and ask yourself later, “Why the hell did I buy that?!” This is usually where emotional spending comes in because, often, these purchases are a result of an impulse rather than planning.
What’s non-essential for somebody else may absolutely be essential for you.
Your business’ needs are subjective. Everyone is going to prioritize their spending needs differently based on where they are in their business. Someone who’s in the early stages of their business will have a different set of needs than an entrepreneur that has been in business for 10 years.
Emotional Spending (13:20)
Emotional spending is spending in response to external and internal triggers.
For example, you get a big check and instantly hop on Amazon to buy all the new books that you’ve been just dying to read before you pay your credit card bill that’s due in two days. This is an emotional response because, in this situation, you’re riding the wave of excitement from just receiving a big inflow of cash in your business.
NOT ALL EMOTIONAL SPENDING IS BAD.
It’s ridiculous to assume that we’ll always spend money without emotion because money is emotional! It isn’t that emotional spending is bad and spending out of need is good. That’s not how this works. It’s more about the intention.
It’s totally fine to spend money on fun stuff for yourself as a reward or act of self-care. What’s important is knowing what’s happening and acknowledging the emotional spending.
Need vs Emotional Spending (15:50)
Both emotional spending and spending out of need are responding to unfulfilled needs. Here’s the difference between the two:
When you spend out of need, the unmet need is operational in your business.
When you spend emotionally the unmet need is emotional.
Here’s another way to understand the difference:
When you spend to meet an operational need, the unmet need is met. Say you need a computer to run your online business. The need is met once you purchase a laptop.
When you spend emotionally the unmet need it never met. This is why emotional spending is dangerous. People spend money emotionally because they’re chasing after something else and hoping the spending will fill the void. Spoiler alert- it won’t.
While emotional spending feels really, really good at the moment, you’ll never truly resolve the emotional need. Emotional spending isn’t something to be ashamed of. It’s just about understanding when you’re spending emotionally and when you’re spending out of need.
Signs of Emotional Spending (19:10)
You’re really hyped up (Shout out to adrenaline.)
If you have a lot of adrenaline pumping through your body when you’re about to buy something- you’re emotionally spending. That doesn’t mean that you can’t be excited about a needs-based purchase. But if it’s something you really need, you’ve probably given your emotions time to stabilize.
You’re on a buying spree.
This is different from just doing some errands. We’re talking about situations like filling up your Amazon cart with hundreds of dollars worth of stuff, and you have no idea how you got there. You’re in a spending cycle, to the point where you’re egging yourself on to continue to buy.
You’re checked out of your spending.
You don’t notice how much you just spent, so you’re not thinking about the consequences of your spending on your finances. When you buy, either your bank account balance decreases or your credit card balance increases. When you’ve checked out, you’re disassociated from spending and not thinking about your needs.
You’re only buying the not needed items.
Instead of buying the essentials, you’re buying the items that you don’t need. It’s okay to do this once in a while, but if everything you bought in the last month was non-needed- you gotta check your spending.
You’re making justifications.
You’re doing mental gymnastics to move that purchase up on the hierarchy of needs. You’re convincing yourself that this purchase will make a difference in your business because of x, y, and z. As a result, you get defensive about your purchases! You could also be unwilling to admit that you actually don’t need the item you’re buying.
You’re buying in secret.
If you’re unwilling to admit that you’ve made a purchase, you probably made the purchase from an emotional place. You could be hiding your spending habits from your significant other, your biz bestie, your business partner, a colleague, or a friend. You either don’t want to admit that you bought something or you’re omitting the information.
Testing Your Spending (32:20)
When you’re in an emotional spending cycle, it’s difficult to understand or recognize that you’re emotionally spending. Here’s a step-by-step process to test your spending for emotional spending or need:
Step 1: Slow your roll.
At the very least, step away for 30 minutes and think about the purchase. Ideally, it should be a day or two, but sometimes you don’t have that much time. Reset your energy by drinking some tea, going for a walk, exercising, stretching, or whatever it is that’ll help you clear your mind.
Step 2: Identify the purchase’s position on the hierarchy of needs.
I created a cheat sheet template which will help you determine where your potential purchase falls on the hierarchy of needs. It’s like Mad Libs for emotional spending! The trick is to go through each template and see where the purchase fits. If you can’t fill out a template, move on to the next one.
__________ (purchase) is essential to the operation of my business because it will __________. If I didn’t buy it, I absolutely couldn’t __________.
__________ (purchase) will make running my business easier because it will __________. Without it, I would spend more __________ (time, money, energy, etc.) doing __________ and less __________ (time, money, energy, etc.) doing __________.
Nice to Have:
__________ will improve my business because it will __________. If I didn’t buy it I could still __________ but I couldn’t __________.
If you can’t fill out any of these templates, the item is not needed. (psssst…down the free emotional spending workbook for a copy of these templates)
Step 3: Ask yourself a series of questions.
These questions relate to the signs that you’re emotionally spending. You can turn the signs around into a question to see if you’re emotionally spending.
- Am I amped up?
- What else did I buy today?
- What is the financial impact?
- How does this impact your finances?
- Is there something more essential that I need?
- Why shouldn’t I buy it?
- Would I tell my best friend that I made this purchase?
Step 4: Assess the situation
Take all the information from Steps 1, 2, and 3 and determine if the purchase is something you really need or if it’s a result of emotionally spending. If you’re emotionally spending, are you okay with making that spending decision? Again, emotional spending isn’t what’s bad, it’s just doing it without being aware of it.
I’ve created an emotional spending workbook to help you work through your emotional spending habits and decisions. Here’s the best part… You can download it totally free!