How to Be a Financially Savvy Consumer

by Sherry Hao, Controller, U.S. Money Reserve

Consumerism has plenty of pros and cons. Here’s what you need to know about making good consumer decisions that can protect you financially.

We are all consumers. Whether we’re consuming goods and services or entertainment and food, we are caught up in a cycle of consumerism. Being a consumer who lives a modern life has both positive and negative consequences and wide-reaching impacts on everything from social justice and the environment to global economics and even our group and individual psychology. Being a consumer is complex business. Yet it’s possible to participate in consumerism and consume goods and services while being both financially savvy and socially, financially, and environmentally conscious and responsible. In fact, being a financially savvy consumer means taking all of these factors into consideration.

If you want to minimize or avoid participating in the negative side of consumerism, you should know some important information. These tips will help you become a financially savvy consumer and help you both protect your own family from the long-term adverse effects of consumerism and improve the world. Here’s everything you need to know about how you can be a financially savvy consumer.

What Does it Mean to Be a Consumer? What is Consumerism?

According to Merriam-Webster, a consumer purchases goods and services for themselves rather than for resale or manufacturing. You are a consumer every time you buy food at the grocery store, clothes at the mall, or a car or a home.

A theory called “consumerism” centers around the idea of consuming goods and services. At the heart of the theory of consumerism is the idea that by consuming, we are helping the world economy grow and thus distributing wealth globally. Famed economist John Maynard Keynes created this theory, and it arose around the time of the Great Depression.

While this definition presents a highly “Pollyanna-like” (overly optimistic) point of view about consumerism, unchecked consumerism — also known as “conspicuous consumption” — has some key negatives. These include issues that crop up around everything from environmental abuse and problems caused by creating consumable products to negative social and economic effects caused by consumerism.

The truth is that consumerism is neither good nor bad; rather, like all human-created phenomena, it falls somewhere in the middle. In fact, whether consumerism is positive or negative largely depends on how and what individuals decide to consume.

Essentially, supporting businesses that do good in the world, have environmentally friendly practices, pay living wages, and offer comprehensive healthcare can genuinely improve people’s lives and the world. At the opposite end of the spectrum, consumers who choose to support and purchase from companies that do not pay a living wage or offer comprehensive healthcare, pollute the globe with either their end-of-life waste or their manufacturing detritus, or have other abusive or oppressive work practices are actively contributing to the negative side of consumerism.

Understand That Marketing Is Everywhere.

Marketing is everywhere, and it is specifically designed to prey on our insecurities and both our individual and group psychology to motivate us to part with our hard-earned cash each and every day. Like consumerism, there’s nothing wrong with marketing. It is simply a human-created tool that can be used for good or ill.

The best defense against marketing — and against buying things you don’t want or need — is to be aware of what marketing looks like and how it makes you feel. Once you can easily spot marketing tactics, you can be mindful of how those who created them are trying to motivate you to spend.

An example of some questions to ask yourself when you believe you’re being targeted by marketing include:

• Is what I am seeing factual or fictional? Does this product actually do what it says it does? Are the claims legitimate? Do I have all the facts? Do I need to do more research?
• How do I feel right now? Our physical sensations and needs and our emotional state can impact how receptive we are to marketing. You’re likely to be more vulnerable to marketing tactics if you’re hungry, tired, angry, depressed, or sad.

By paying attention to how you may be influenced by marketing, you can gain better control over your financial decisions and take a step toward being a financially responsible consumer.

Make a Budget and Stick to It.

I’ve written extensively about how to make and stick to a budget. While the idea of budgeting can often conjure up images of self-denial and restriction, the reality is that budgets and the act of budgeting can be incredibly freeing — especially when it comes to living within your means. Budgets essentially give you guardrails for financial decisions, and setting a budget is one of the first steps you can take toward being a financially savvy consumer.

Basically, you need to get a clear understanding of what is coming into your accounts and what is going out. Do you have a mortgage? Car payments? Insurance payments? Those are all payments that go out of your account. Your salary, income, or any other source of money coming into your account affords you the ability to pay for those items. You can get into deep financial trouble when you have more going out than coming in. The idea of a budget is to get a handle on your financial health so you can continue to make good decisions for your wallet about how you spend your money and participate in the consumer economy.

Know the Difference Between What You Need and What You Want.

This can be a tough lesson to take to heart: Know the difference between what you need and what you want. Sometimes it can feel like we really NEED a new dress, a new suit, or toys for our kids, but the truth is we don’t. Needs are defined by most economists as basics we need to survive. Items like shelter, food, and water are basic human needs. We also have needs that help us continue to thrive or grow. For example, most of us need a reliable internet connection and a computer or reliable transportation to get to and do our work. We also need certain clothing items so we can keep our jobs and earn money to cover our core needs (food, water, and shelter).

On the other hand, wants are things that tend to be more frivolous — things we can live without. Pretty much anything that falls outside of needs are wants. Read that one more time. Anything that doesn’t fall into the needs defined above is a want. Yes, that does encompass things like a new pair of shoes you’ve been eyeing or a piece of jewelry you don’t need. There’s nothing wrong with wants; it’s just important to know how they influence you to spend.

Once you have an idea of what you need and want, you can use your budget to move on to the next step of becoming a financially savvy consumer: doing your research.

Do Your Research.

Once you’ve determined your budget and defined the item or service you’re eyeing as a need or a want, it’s time to do your research and find options that fit your parameters. These parameters can include things like price, value, features, longevity, and long-term cost, as well as the social, environmental, and psychological impact buying the item will have on you and others.

How expensive the item or service is; how frequently you plan to use it; how the product or service is manufactured, distributed, or disposed of; and how the employees who create it are paid and treated should all factor into your research.

It’s essential not only to consider how you will use the good, service, or feature, but also how your purchase will impact the broader consumer ecosystem and the world. For example, many people believe electric cars are a sustainable long-term solution to the environmental damage caused by internal combustion engines and fossil fuels. While electric cars are greener than those powered by gasoline or diesel, they are not without their environmental costs. Lithium-ion batteries underpin many electric vehicles, and lithium is very dirty to mine. In the past, some battery makers have used child labor to mine the toxic element, too. Those are factors you should be aware of when choosing how to spend your money.

Once you’ve done your research and narrowed down your choices, it’s time to figure out whether you can and should purchase the good or service.

Make Good Financial Choices, Free of Influence.

One of the most significant factors when making financially savvy consumer decisions comes down to making good financial choices. That means taking all the previous pieces of advice into consideration to make the best decisions for you and your family.

It may pay to revisit some of the sections above to double-check that you’re making the right financial decisions. A few questions to ask yourself when deciding whether or not to purchase something and to check whether you’re being a financially savvy consumer include:

• Is this a need or a want? Do I actually need this item or experience in my life?
• Can I afford this? Do I have the cash on hand to purchase this item right now? Does it fit in my budget? What is the effect on my budget if I purchase this?
• Is it worth the price? Have I wanted this item for a period of time that feels acceptable for this price? What are the environmental, social, and global impacts of my purchase? Is my money doing good in the world? Can my spending have a greater impact elsewhere?

Suppose you feel good about the financial decision you are going to make. In that case, it’s safe to say that you’ve taken all of these questions into consideration and are making a financially savvy decision. If you feel bad about your financial decision at any point, it’s probably best to find another way to spend your money.

Being financially savvy means understanding all the subtleties of marketing, consumerism, budgeting, financial responsibility, and social responsibility. While it can feel overwhelming, it’s well worth considering all of these aspects when working toward being a financially savvy consumer. The more you understand how consumerism works and how you can be influenced, the more likely you are to make better financial decisions that work for you and your family.