Another year has gone by, and Christmas will soon be here again. Time off work, eating and drinking with friends and loved ones, and of course, gifts to give and receive. What is not to look forward to about this merry time of year?
However, nearly half of all Australians are not excited about Christmas and one in ten feel an extreme apprehension towards the period finding the preparation and cost tremendously stressful, not to mention the excessive work for the person/people hosting events.
Australia’s Christmas spending statistics reported $17.3 billion being spent in 2020, an equivalent of $893 per person. This year Australians are set to splurge on Christmas after lengthy lockdowns with the Australian Retail Association (ARA) suggesting an increase of 11.3% on pre-pandemic levels.
Online shopping has become even more common in people’s lives due to the COVID digital acceleration, promoting convenience, accessibility, and the constant offer of bargains. At the checkout of your online order, you are presented with a few payment options, from paying directly from your bank account, via a credit card, or payment vendors such as PayPal or Afterpay. Your payment selection will determine if you are enforcing unhealthy spending habits or having your budget in control.
Buy Now Pay Later (BNPL) swept shoppers off their feet when the platform launched in 2015 allowing faster access to goods and services. Upon signing up you are provided with an estimated spend limit with no prior credit check requirement and zero impact on credit history.
Afterpay, one such BNPL service splits consumers’ cost of purchase into four equal payments due fortnightly. The more you continue using the account, the more that spending limit increases. If you miss a payment, an initial late fee of $10 is incurred and if the outstanding balance is not paid within 7 days you will be charged a further $7 fee.
So, what is the danger then? You may think to yourself; “I will just buy now using BNPL and I will pay it back in no time. It’s only $10 extra if I forget, that is still a good deal.” Yes, you can pay later but you must pay the total back eventually and despite a $10 overdue fee not looking like much, if converted into a percentile, a credit card’s interest rate may be more competitive.
Our brains are wired to set us up for failure. Physical cash is the most tangible form of payment and also triggers the greatest psychological pain upon giving it away. As humans, we have a bias toward avoiding losses. Having a positive trade-off of assigning gives more of a connection to the product or service.
Credit cards could be considered a prototype of Buy Now Pay Later, creating a defensive buffer in the transaction, distancing the pain of giving away money in exchange for the product. However, this method can also weaken impulse control that would be otherwise regulated through a physical cash payment. BNPL’s timing payment services impact the perceived value of a product and provide a balance between pain and the ability to purchase. Younger generations face a higher risk of long-term underbudgeting, lack of understanding of the value of money and not experiencing delayed gratification through savings.
Have you noticed any changes in your consumption behaviour over the last year? How often do you shop online and how do you pay for goods and services? Once in a while, a self-check of your behaviour could reduce patterns of overspending and allow you to reset.
As a rule of thumb, having a budget in the first place helps you to assess what you can actually afford. Whether you create an excel spreadsheet and allocate yourself weekly spending money or simply write things down, as long as you are recording your expenditure, your brain will examine the evidence for and against reasoning, recognising your behavioural patterns faster or more accurately over time.
Secondly, consider splitting your bank accounts into small buckets of funds for instance: one account catering for living costs and bills, a second for entertainment and holidays, and a third for anything you save above.
Finally, if budgeting is not your forte and requires more assistance there are some simple to use budgeting apps available through the Money Smart website.
Happy Festive Season and happy budgeting.
Veronika Holubova (MFinP, GradCertFP, ADFP, DipFP) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.