Many consumers across East Africa feel stretched waiting for their salaries at the end of each month hoping that their earnings last that long.
But in some countries, like the United States, almost half of organisations pay their employees twice per month with the majority of remaining employers paying staff weekly. So, roughly every week or two weeks staff receive deposits into their bank accounts.
However, in Kenya and most of East Africa, the majority of entities pay their salaried workers only once every month.
Since organisational laziness and frugalness in saving nominal disbursement costs subsides here instead of running weekly or bi-weekly payrolls per month, we must make our paychecks stretch longer before being replenished.
From a corporate perspective, it helps a company shift cashflow issues onto their employees’ backs to have their delay in staff salary payments fund part of an entity’s poor working capital days on hand conversion.
Our human resources practices accentuate the psychological “bottom dollar” effect. As we whittle down our earnings each month, it becomes more painful to spend each additional shilling. As renowned psychologist Eva Krockow delineates, humans make dissimilar financial spending choices based on the time they spend and on how much remaining cash they hold within their immediate grasp.
The purchases we make that eat into our budgets and leave little remaining in our accounts are felt much more deeply with disproportionate emotional pain than purchases that we make that still leave ample cash in our accounts.
We see examples of the bottom dollar effect here in Kenya with more Friday evening traffic jams and packed restaurants at the end of the month once most workers get paid.
Researchers Robin Soster, Andrew Gershoff, and William Bearden even highlight that purchases made with someone’s last dollars or shillings yield lower post-purchase perceived value and satisfaction of the item or service bought.
Companies that understand the bottom dollar effect and the decision biases that it causes consumers can utilise it to entice customers to spend during the first week after paychecks get released.
Most consumer-oriented marketing should be conducted during this space when buyers feel wealthier with more on their M-Pesa wallets and in their bank accounts and therefore will irrationally spend more.
But on the consumer side, how does one help push beyond the psychological bottom dollar effect? Eva Krockow advocates for greater flexibility in how someone categorises money in their mind.
First, spend time reflecting on how your emotional feelings and urges influence your spending. Notice times, conditions, and types of marketing that pull at your heart and cause a yearning to purchase.
Second, consider putting a substantial percentage of your earnings into a savings account for the first two weeks after receiving your monthly wages. Such an action puts up a mental barrier to spending feeling as if you have less cash readily available for spending.
Third, watch out that you do not fall victim to special discounted deals often offered by retailers in the week preceding the normal pay date at the end of the month.
When we are feeling our lowest from the bottom dollar effect, it is often in the last week before we receive our salaries and therefore, we are susceptible to special advertising that make us feel like we are saving money through special deals and discounts whether from phone credit to groceries to electricals, etc.
Fourth, do not set strict limits on your spending per category of the shopping you need in a given month. Allow flexibility. Work off a mental wholistic list of a month-long budget instead of setting mental buckets within each to categorise your monthly spending.
Fifth, set aside an emergency reserve fund each month in a separate account so you do not feel so despondent with the bottom dollar effect fearing any unforeseen eventualities.
In summary, become aware of the role that your emotions play on your financial spending habits. Chart how and when your feelings pull you to make purchases. Then develop strategies to overcome excess irrational spending as well as dissatisfaction from bottom dollar spending with your valued shillings.
Dr Bellows is an Assistant Professor of Management at USIU