Deliberate vs Impulsive Spending Habits

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I frequently have clients come to me with a list of wants versus needs. Conscious or not, they create veritable Venn diagrams of their “nice-to-haves” and “want-to-haves,” and they think their business needs will align somewhere in the middle.

As an accountant and small business coach, I appreciate these, as it helps provide a prioritized list. The assets that are needed fall into the short-term business planning, while the “nice-to-haves” are elements I factor into the long-term planning.

Now, there are two types of clients: Those who think the Venn diagram will work for them, and those who have been trying it and are struggling to understand why it’s not working. I find these two types of clients usually have two distinct businesses. The former are usually people who have a steady income (where their business is part-time gig they want to grow), while the latter have a flexible, contract or commission-based business (such as SaaS companies or realtors). Neither end up working out well because they lack long-term planning. While on the surface, it can appear thoughtful, it’s ultimately rationalizing inconsistent (and often impulsive) spending habits.

Daniel Kahneman, esteemed psychologist and economist, published a book in 2011 titled Thinking, Fast and Slow. Without rehashing the book, the idea posited is people have two types of thought: deliberate and impulsive. There’s a balance you should seek to achieve, and nowhere is this more critical than with growing a business.

For businesses that are being “grown” as a side project, I have to communicate that it’s ultimately an impulsive, short-term financial model. It’s not that they need to invest all their time and effort into the business to grow it; they don’t need to “scare” themselves into working harder to succeed. But so long as the client has a 9-5 job, the side project is always going to be a “nice-to-have.” It’s always going to be the first expense they cut. For a small business to succeed, it needs to be a priority, not a luxury. I’ve had clients secure a new account with an ad hoc meeting. Prospective partners or accounts might be passing through Arizona, and I’ve had clients tell their potential lead that they’ll “be in the area,” then immediately book a flight and wind up having a business-changing meeting. While seemingly an impulsive purchase, following a lead like that is the result of careful financial planning.

My client wouldn’t have booked that ticket unless he had a clear roadmap of budget for the next few months. He could afford to take the risk because of the long-term, deliberate plan. If this flight would’ve “put us in the red,” I might’ve argued against it. Impulsive decisions can be made when there’s a deliberate plan in place.

Similarly, the full-time, but flexible income, business models need to be more flexible. I’ve had many an SaaS or real estate client build their annual budget based on anywhere from 3 to 10 years’ worth of data. This seldom works because these jobs are flexible by nature, and the business plan needs to reflect that. Whether it’s a client that just doesn’t pay or a house that just doesn’t sell, the roadmap needs to adjust with the client’s ever-changing income.

In short, flexible income clients need to speed up their slow thinking to play to their business model, and full-time income clients need to slow down their fast thinking. This way, the small business has goals rather than remaining a hobby.

Again, it’s a balancing act, and having an accountant’s expertise can help the client moderate their speed to achieve their goals.

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