Do you ever look at your bank account and wonder, “Where did it all go?”
The most challenging client for a financial advisor is someone who can’t get out of his or her own way, whether it’s acting like they are the expert or perpetuating bad money habits. I had one like that. She meant well and wanted to be financially responsible -- which is why she hired me -- but couldn’t stop overspending, despite my warnings.
She had plenty of excuses: “We can pay it off later.” “My husband grew up poor and so he wants to spoil our son.” “I just can’t seem to help myself.” “I return most of what I buy anyway.” I finally had to tell her that it was impossible for me to help her if she continued her financially irresponsible behavior. Secretly, I felt a little bit guilty because I could relate to many of her excuses as I’d used them myself.
There are probably as many reasons why we overspend as there are reasons why we shouldn’t. The first step in changing our behavior is to recognize the triggers and to consciously confront them when we’re tempted to give in. But if we truly want to overcome overspending in the long run, it’s also important to examine the more deep-seated reasons why we do it. Here are eight common underlying causes for overspending and how to overcome them.
The Reason: You’re Using Plastic.
Americans made twice as many in-person transactions using cards than cash last year, and, over the next decade, debit cards alone are expected to overtake cash as the main form of currency used for all transactions. And let's face it. Using a card--even a debit card--simply does not feel the same as handing over plain old paper cash. There is something about taking one little card out of our wallet that is so much easier and less painful than counting multiple bills, handing them to a cashier and watching them disappear into the bowels of the register. It can also be a hassle to go to an ATM on a regular basis and many people are uncomfortable carrying a lot of cash.
But the downside of carrying cards is the ease with which you can overspend. The pain of seeing your funds diminish when you hand over cash actually acts an effective barrier to overspending.
The Fix: Try using cash for a week (or even a month). Hit the ATM on Sunday and take out the amount of money you feel comfortable spending that week on everyday purchases. Put it in an envelope, and use that as your ATM for the week. That’s a guaranteed way to avoid busting your budget. If you overspend one day, you’ll have to compensate for it the next. One week of using cash, and we guarantee you’ll have a much better sense of what you’re spending every day and what’s really worth the money. (Want some inspiration? See what our writer Terri Trespicio learned from trying to live on cash only for a month.
The Reason: Your Lifestyle’s Bigger Than Your Budget.
If you’ve lived a certain way for a while, and suddenly encounter a financial hardship or additional expense, it’s often hard to give up the lifestyle you’ve been accustomed or to cut back, even if staying the course means racking up more debt.
As Americans, we grow up expecting our earnings and our lifestyle to continue to improve throughout our lives, but that’s not often the case. Expenses and earnings can fluctuate throughout our lives, as the economy does. (The median U.S. income actually dropped last year.) If we don’t adjust accordingly, we can end up in worse shape financially.
The Fix: A little preparation goes a long way. If you make a point of consistently living below your means during good and bad times, and make sure you have at least six months of savings set aside, you’ll have a cushion if your expenses jump (with a new baby, say, or a long-term illness) or your income drops. One easy way to learn to live on less and build up your savings: Set up an automatic transfer into a savings account that you don’t touch until, or unless, you need it. After a few paychecks, you won’t even notice it’s gone and won’t look at it as money to spend.
The Reason: Your Childhood.
Many people who grew up poor may feel the urge to overspend to compensate for feeling deprived as a child or to make it seem like they are breaking the lower-class cycle (even if, in reality, they’re hurting their own finances by doing it).
Similarly, many people who grow up in affluent families feel compelled to spend money to maintain the lifestyle they grew up with even if they don’t have the income to do it.
And regardless of class, there’s a tendency to repeat the bad money habits we observed in our parents as they’re often our only financial role models.
The Fix: If you lacked good financial role models or advice as a kid, seek them out as an adult. You don’t need to look any further than your local library or bookstore to find inspiring and instructive stories. Some of our favorite picks: “Rich Dad, Poor Dad,” “Your Money or Your Life,” “The Millionaire Next Door,” and “Secrets of the Millionaire Mind.”
The Reason: You’re Trying to Keep Up Appearances.
Many people live according to their presumed expectations of others and try to maintain an image that they think they “should” have. (Our writer Sandy Fernández opened up about this in her recent essay: “Are You Acting Your Age?”.) The irony of `keeping up with the Jones's’ is that the Jones are probably trying to keep up with you too, so you both perpetuate the cycle of overspending.
The Fix: Focus on your goals, rather than your neighbors. Take some time alone to think about what’s most important to you--what you want to have in your life (independent of what your peers may have). Once you’ve identified your goals and what you’ll need to get there, keep them front of mind (it may sound corny, but visual reminders help). When you’re saving money for something that’s important to you, what your neighbors are doing with theirs will seem less important.
The Reason: You’re Feeling Peer Pressure.
I know plenty of women who spend too much money when they are with their friends or colleagues because they’re too insecure, or feel too uncomfortable, to admit they cannot afford it. If the people you hang out with make you feel bad because you cannot afford to eat, shop and vacation where they do, are they really worth going into debt for?
Even well-intentioned friends can have a bad influence on you if they have bad money habits themselves (sometimes without you even being aware of it).
The Fix: Make plans that won’t require a big payout. Meet friends for coffee or a drink, instead of a meal. Go hiking or running in the park. Invite friends over for dinner. And surround yourself with the friends who will support you as you work toward your financial goals. (Seems obvious, we know. But many of us don’t think about it.)
The Reason: You’re Filling an Emotional Void.
You can’t control many of the events in your life, but you can control your spending and your eating. And those two behaviors can go into overdrive when you’re feeling unhappy or that other parts of your life are out of control--whether it’s devouring the clichéd pint of Ben & Jerry’s on your couch or setting off on a shopping spree. If you’re feeling sad, stressed or anxious, studies have found that 1) you’re more likely to overspend, and 2) that shopping can actually act as a short-term salve. But it can also trap you in a long-term (and costly) ‘loop of loneliness’.
The Fix: Shopping can be an effective if temporary distraction, but it also keeps you from dealing with your feelings. Instead, look for a solution that will provide lasting relief, whether it’s putting that ‘retail therapy’ money into real therapy, dealing directly with the situation that precipitated the bad feelings, or just taking a walk with a friend. That won’t cost a thing.
The Reason: You Just Can't Say No.
Happiness researchers have found that spending money on others makes us feel good. But there’s a difference between giving to a cause we believe in, or surprising a friend with flowers, and over-indulging those we care about.
Whether it’s your child’s relentless requests for a new toy or a treat, or your husband’s desire to upgrade to the latest HD television, it can be hard to say no. Why? The reasons can range. But I’ve found that for some, they feel like they’ve failed to some degree if they cannot indulge the people they care about.
The Fix: Give your kids an allowance. Next time they ask for a toy or a treat, you can give them to option to use their own allowance money (or save their allowance up to pay for it). Using their own money will also give them a better understanding, and appreciation, of how much things really cost.
And take time to establish your financial priorities with your partner, so that you’re both aware of where the money is going. It can also help to budget a little extra each month for indulgences to allow for some spontaneous purchases.
The Reason: You Don’t Have Clearly Defined Goals.
Not having a firm understanding of your short-, mid- and long-term financial goals can lead many you to lose sight of what’s most important and give in to spending temptations.
The Fix: Get clear on your goals and what it will take to reach them. Creating a financial plan can seem overwhelming, but it doesn’t have to be. Whether you go the do-it-yourself route or work with a financial professional, the process starts with simply prioritizing and visualizing your goals, writing them down, and thinking about how you’ll feel when you reach them.