Coping with the Cost of Living Crisis – a Behavioural Perspective



Housing prices have been on the up ever since I can remember, but now mortgage rates have increased too, suddenly making these houses even more expensive than expected. Energy bills are increasing rapidly, doubling for most and for some even tripling, which is simply not something most people had budgeted for. Tag that along with an overall inflation rate of above 10% and you quickly realize that we are f*ed. A large number of people cannot afford this. Yes, we are in a cost of living crisis and as of recent, also in a recession. The fact that the unaffordability is effecting everyone and seems to be the only topic the news suddenly seems to want to cover, ironically isn’t helping anyone. Sure, it has raised awareness and several governments have stepped in to curb energy price increases, public transport increases and rent increases, but for most people it has just caused a lot of stress, anxiety or even panic. And these are not good emotions to make decisions under. What happens when you’re panicking? Well if it’s in a short-term panic, such as being confronted with imminent danger, you produce adrenaline. This hormone allows you to suppress several other bodily functions to redirect all your focus, energy and strength towards one thing: survival. If you panic, or rather stress, for a prolonged period of time the body shifts production to cortisol rather than adrenaline. However, the effects are rather similar, although they are a bit weaker for cortisol. The situation that has us panicking (or just stressed) gets disproportionately more attention and other resources directed to it, becomes more salient as a result of it and propagates continuous cortisol production, sinking us deeper and deeper. At the same time, because we have essentially paused some of our necessary bodily processes to keep both our physical and mental health in check we are also less resilient to coping with the stressor. And down we spiral. From a decision making perspective this is a disaster. We now have less resources (cognitive capacity, rationality, patience) to direct towards dealing with the stressor. This makes us more likely to make emotional, system 1 type decision, which will be more present or immediate solution focused. We will act out of fear, simply to act, because we are too scared not to, but maybe damaging our finances, and/or mental health in the process. Or, we are so overwhelmed and rundown at the same time that we forget to act at all. Especially as it all seems to be going to hell so quickly. I do understand where both of these “emotional profiles” are coming from, but they aren’t useful. To act out of fear is to think with a scarcity mindset. And just because resources are currently becoming scarcer, does not mean your mind can afford to become scarce too. It actually means the opposite. Yes, we have some difficult decisions to make, but we need to make them whilst in the right headspace. Calm and collected. Because it may be hard, but we will get through this. Because we’ll have to. So what can you do?

Essential Expenditures Looking at essential expenditures, and I’m talking rent/mortgage, utilities, groceries, insurance, transport and other more personal categories I may not be aware of, we need to refinance and then start cutting. Refinancing is exactly what it sounds like: checking if you’ve got the best deal. For rent this is going to be harder unless you’re willing to move (not cheap either), but it is an option. For mortgages this is doing some due diligence online and seeing whether you have the best rate there is. Don’t bother with additional packages and features to your mortgage, it’s a payment plan not an iPhone. Get the best rate. If you want to save yourself the hassle of switching lenders, call up your mortgage provider, explain to them the new deal you’re looking at and ask them to match it. Maybe they will, maybe they won’t. Always shoot your shot. And if you miss, well you’re apparently switching mortgage lenders. The Barefoot Investor has an entire chapter on this. Read it. Utility companies (gas, water, electrics) will get the same treatment. Do price comparisons online (but only with sites that display ALL energy providers, not just the ones that paid for the advertisements). The same for insurance. All types of insurance. Cut out what you don’t need and refinance. See how far you get with calling your providers and alerting them that you’re about to move onto a better deal. No one likes losing a customer they thought they had in the bag (that’s the endowment effect!) When it comes to utilities, there are small behavioural interventions that can help too, by decreasing appliance usage. If you’re working late at night, don’t have all the lights on, just buy a single desk lamp. Which should be an LED. Just like all your lamps. In the morning don’t boil the kettle for a single cup of tea, boil it to make a whole pot and drink it through the day. Same with coffee (I don’t make coffee so no clue if that advice works, sorry). If you’re in a tank top and have the heating on, you’re not doing it right. Heating off, jumper on, blanket on top. And if you’re cold often, do some exercise, is good for you. Also, on a super random and personal note, I’ve noticed I’m less cold when I’ve eaten a lot of protein, something to keep in mind maybe. Shower quickly instead of taking baths. Luke warm instead of piping hot. Think of all your habits that involve energy or appliance usage and try to get more bang for your buck. And if you do have the money for it, replace the less energy friendly appliances with appliances that don’t use as much. It will make an impact, not enough to solve the entire issue (looking at you, UK government… wtf were you thinking?!), but it’ll make an impact. And don’t use dryers. Air dry clothing – also makes a big difference. What to do with transport is highly personal. Maybe it’s time to carpool if you have a car. Maybe it’s time to get rid of the car altogether or heavily reduce using it in favour of public transport. Maybe cycling is a better option. You tell me how much you’re willing to give up. Or rather, how much you need to give up. Moving onto the slightly more behavioural aspect that is groceries. Yup, here is where behavioural science can shine. A quick fire round of tips: do not shop hungry, meal prep, only go in with a list, only buy store own brand or whatever the cheapest brand they offer is (no one cares about branded cashews!), use an expenditure tracker in the store, use cash when paying and don’t even take your cards with you, buy frozen not fresh, buy soon-out-of-date discounted items and either use them asap or just freeze them. For more tips read this article on shopping like a behavioural scientist. Oh and one more killer tip: go to Aldi or whatever your country’s Aldi-equivalent is. They are a lot cheaper.


Extra Expenditures The previous section was on essentials, this section is extras. This is the “extra” money you spend on yourself that doesn’t need to go to somewhere or someone else, such as your landlord or bank. Now if the situation is dire, and I mean DIRE, you’ll need to cut all of this. This sounds awful, and it is, but it is better than getting into a debt spiral (more on that in the next section). What you can do here is turn it into a challenge (I’m not joking). Gamification can work wonders and might also help getting the younger generations (your kids?) get onboard. One such a challenge is a no-buy month. Now I’m not a massive fan of extreme cutting because it’s cognitively draining and that doesn’t allow for any adjusting which must behaviour needs to be sustainable. It can also lead to a massive “revenge” effect which is that after one or several no-buy months you’re so depleted that you just can’t do it anymore, lose your sh*t, go on an online shopping bender and undo some if not all of your progress. However, for some people this may be the only solution For people who can see, but do not yet feel the fire, it’s time to start cutting regardless. This crisis has only just begun and help is barely on its way. I have written on how to reduce your spending before, and I do still stand by this advice, especially the last point where first you need to budget, track and third you need to plan for purchases. If you cannot help but spend money because $ means nothing to you, calculate for each item how long you’d have to work for it. And then also ask yourself what else you could do with that money. If this is a lifestyle which is unsustainable for you (I get it), you need to budget it “splurge” moments. You’ll need to actively save money to be able to spend it on a “splurge” item, such as a pair of heels. Using this trick you might find out that you’re just an impulse spender and that once you have to wait to buy you don’t care too much about the item anymore and don’t end up buying it after all (this is also largely the trick behind Save-now-buy-later products, an article on that coming soon!). If that’s the case, another key trick is to leave the house without money on you, or only with cash. The Guardian recently published an article about people turning back to using cash as a way of controlling their spending, and it does work, because cash is a limited source of money due to its physicality (my research also got mentioned in the article, so yay me!). I also find that we default to expensive things out of habit or boredom. The habit is especially strong for social situations: haven’t seen someone in a while? You go out for drinks or dinner. Well, no more! It’ll be potlucks and game nights at home from now on. It does help if your friends and social circle at large do the same thing. Hold each other accountable, make it a challenge. You know how this works. The second part is to not get bored. Time to take up hobbies that are essentially free, such as reading, learning a language (Duolingo), hiking, drawing and painting (with cheap materials) or graphic design, learning how to code. Learning any new skill really! For those who really want this section spelled out for them, here we go: cut the majority of your subscriptions. You don’t need 3 streaming services. One will do (also you can find a lot of series online anyway, if you know what I’m saying). You do not need Spotify, install an adblocker and listen to free stuff on YouTube. Do you even lift bro? No seriously, do you? Because otherwise that gym subscription is out. Subscriptions are a bloody plague. Click here to read why. How much have you spent on eating out? Exactly. From now on this will need to be cut for about 75% and add the remaining 25% to your grocery budget, you and your friends are now throwing dinner parties, preferably potlucks. You’re not going to the pub, you’re hosting a drinking game night. And you WILL NOT open the H&M website late at night.


Debt There’s two different approaches to debt I want to make you wary of: getting into it, and getting out of it. Let’s go. Should you get into debt during a recession? Well, I’m afraid for some people it’ll just be unavoidable. However, there’s debts that you should just stay away from: BNPL and credit. Do not put your expenses on either of these payment plans, they’re too expensive. If you have to take on debt, first try to see if you can loan it from a friend/family member who can loan you the money against agreeable terms. If not, try to get a personal loan on a peer-to-peer lending website. If even that doesn’t work step to a bank for a personal loan. Those terms will still be more favourable than credit or BNPL because chances are, and here is where the problem lies, that you won’t be able to repay it in the originally allotted time. Because we’re in a crisis. And then something like BNPL can become very expensive, very quickly. Issues with BNPL have arisen already, as numbers reveal that a lot of BNPL users are using the payment plan to pay for essentials such as food and medicine, but then have to move the BNPL debt onto their credit cards to avoid the BNPL late fees. This is also known as debt-stacking and is a sure fire way into a debt spiral. Try to avoid this as best you can. The only thing worse is a payday loan. Now, in terms of getting out of debt, or rather repaying your debt. If there’s debt repayments you can pause without consequence, so you don’t have to acquire more debt whilst figuring out how to deal with the recent rapid price and cost increases, do that. It’s not a bad idea to avoid more debt right now. HOWEVER, this is not a tool for you to keep living the lifestyle you’ve gotten accustomed to whilst we’re in a crisis. You need to refinance and you need to cut. It’s always a good idea to live well below your means and being debt-free is a large part of that. So if you have savings that aren’t part of the emergency buffer you’ll likely need to deal with the rising cost of living, use it to repay your debts. No co-holding!


Savings On the topic of savings, recessions are a good time to save, but not a good time to hold large savings. Yes, you need an emergency buffer and yes, you should repay your debt, but if you are the type of person who has managed to do both (good for you!) it’s time to take the next step: investing. The current inflation rate is above 10%, the average savings account rate is under 1%. You’re literally losing money here. Time to invest. Now without giving financial advice here don’t try to time the market, or chase Bitcoin or all that jazz unless you actually know a lot about investing (which I doubt you do if you haven’t taken this step already despite having the means to do so). ETFs (exchange traded funds) capture the whole market, or a balanced portfolio of a market sector. The S&P500 is a good example of this: it holds the 500 biggest companies in the US (measured in market cap.) – also fun fact: although it holds 500 companies the S&P500 exists out of 503 stocks, not 500. The more you know! I will link several articles on behavioural finance (the behavioural science approach to finance) at the end of this article that were also posted on this blog, but were in fact not written by me, as I do not identify as a behavioural finance expert.



Earnings Last but certainly not least: your income. If you cannot reduce your outflows (any further) and you’re still not making ends meet, you need to increase your inflows. Can you make more money? Now I’m wary of making this article any longer than it already is, so I’ll leave you with this: this recession is rather unique in that companies are still producing at a high level and as a result still need people. The employment market is on the verge of collapse as jobs aren’t being filled. Yes, there is demand for workers, but no supply. You, my friend, are a scarce resource. Oh how the turned tables have… (50 points for whomever gets that reference). And don’t worry – I’ll write an article about this too: how to use behavioural science to upgrade your job!


 

Behavioural Finance Articles: - Introduction to Behavioural Finance - Applying Behavioural Finance - How to Invest so You Never go Bust - Bad Investors’ Behaviour - How to Manage your Money like a Behavioural Scientist (part 1) - How to Manage your Money like a Behavioural Scientist (part 2)