Researchers Surprised by This Payday Behavior

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For many of us, even in the age of direct deposit, mobile payments and swiping of plastic cards, a paycheck still burns a hole in our pocket.

If the line at Starbucks seems extra long on certain days, it could mean that people share more than a collective craving for caramel macchiatos, researchers say. They might also have the same payday.

Even in the age of direct deposit, mobile payments and swiping of plastic cards, a paycheck still burns a hole in your pocket, they say. Budgets go out the window on payday, when people feel they have a license to spend.

People at all income levels spend more on discretionary goods — things like clothes, entertainment, and fast-food meals — on days they get paid, say researchers Michaela Pagel, an assistant professor at Columbia University Business School, and Arna Vardardottir of the Copenhagen Business School.

“According to standard economic theory, people make financial plans and budgets, but our research shows that people don’t behave consistent with theory, especially on the day they receive their paychecks,” Pagel said.

The pair studied consumers’ electronic payments and found that more than half of the population increases its spending on paydays by over 25 percent. Individuals are more likely to go shopping and, once they’re out, to spend more than they normally would — a double whammy for the pocketbook, they said.

Retailers know this, they said. Grocery stores, for example, raise prices at the beginning of the month, capturing an enlarged slice of consumers’ end-of-month paychecks. And, they caution, dollars spent on payday lattes aren’t going into savings accounts.

Automatically stashing money away in a savings account on payday can help you achieve longer-term goals such as a European vacation, the kids’ college tuition, retirement or an emergency fund in case of a natural disaster, disease or job layoff.

Historically, the professors said, economists have attributed payday spending to a lack of cash on hand, due either to a lack of savings, as among the working poor, or to wealth being tied up in houses, cars and investments, as among the more affluent.

However, the researchers said, a psychological response may cause people to spend on payday. Despite the fact the income is expected, the influx gives consumers a momentary feeling of being flush with cash, leading them to splurge on more, and pricier, goods.

“Payday spending is a completely understandable behavior from a common-sense standpoint, but it doesn’t make sense according to the economic models, which says people optimize their budgets across time,” says Pagel. “So theoretically, you shouldn’t see people consuming more just because they have more money one day – yet it happens.”

How do you handle payday? Share with us in comments below or on our Facebook page.

Stacy Johnson

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