The rise of social media

While beginning as user-based applications, many social media services have since evolved into powerful advertising tools. Businesses have found social media particularly effective at helping them engage with their customers and increasing consumers' brand awareness (source: Statista). As a result, social media spending has increased dramatically over the years, as businesses spend more money to reach users (in the US alone, social media spending was $9.4 billion in 2015 and is expected to reach over $17 billion in 2019).

The impact of social media advertising

Consumers regularly say that they are not impacted by social media or other marketing efforts, but data proves otherwise.  From looking at how others are spending their time and money, to more exposure to advertisements, here are some impacts social media may have on your spending.

Targeted social media ads

Targeted social media advertising allows companies to expose users to their product or service before it is intentionally sought out. Facebook, for example, allows advertisers to target sponsored posts based on your general demographics, such as age and gender, as well as more detailed characteristics, such as whether you are a parent or if you own a home.

This level of detail means that you may not immediately recognize the advertisement for what it is, and may be more receptive to the post's message and more likely to further engage with the brand or spend money on the company's product in the future.

Social proof

Social proof is a psychological phenomenon in which people look at others' behavior for cues when they are not sure how to act, under the assumption that the group's behavior reflects a more knowledgeable position than their own. Within social media, metrics such as Facebook likes, Twitter followers, and Instagram comments tend to increase your perception of the trustworthiness of the company and the value of its product or service – without verifying that the metrics are produced by well-informed buyers. For example, if you see that the newest clothing company has a post with 10,000 likes, you may be more inclined to buy something from their website without doing more research on their brand.

Keeping up with the Joneses

The idea of having to keep up with what your neighbor is purchasing to avoid feeling financially inadequate has been around for a century, but it is particularly tangible in this era of social media. Reading your friends' social media posts exposes you to people who prioritize spending, because they are the ones most likely to post about exciting and enviable purchases and vacations. 

Since people do not tend to post about maxing out their 401(k) for the year, users are left with the mistaken impression that many of their connections are able to afford expensive purchases, when in reality, they are not. This may tempt people to make purchases they cannot truly afford, and to direct spending away from more important but less outwardly exciting goals.

The "mere exposure" effect

Another long-known psychology concept is called the "mere exposure" effect, in which the more you are exposed to something, whether that be an image, person, or brand, the more you will like it. Many social media ads are designed to create positive impressions of a brand rather than immediately sell a product, and over the long-term, the mere exposure effect may lead you to be more likely to buy a product or service from the advertisers you have been most exposed to, rather than the one that has the best product.

Don’t fall for these traps!

Social media has a powerful and sometimes unconscious influence on where you spend your money. It enables you to become a smarter buyer through exposing you to more products and services that can improve your life, but that same exposure can also have detrimental impacts on your spending habits if you are not careful.

As a smart social media user, you should be aware of the temptation to make impulse buys and instead take time to plan out your purchases to make sure you really need the product.  Furthermore, do not assume that more social media followers mean the product is better, or that everyone around you has a more fulfilling and exotic lifestyle than you do. If you are financially well-prepared, social media can fun, fulfilling, and informative.