7 Reasons People Overspend & How to Overcome Them

profileCarly DeBeikes | March 9, 2022
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Overspending is an insidious and unavoidable problem for many people, whether or not they realize that they’re doing it. Fortunately, there are surefire ways to protect against the problem of spending more than you have.

1. Impulse Buying

Why do people overspend? One big reason is that people buy on impulse.

A staggering 76% of purchasing decisions are made when shoppers are already in the store aisles. As part of that, 57% of shoppers ended up spending more money than they anticipated.

The reason for this is that in-store decisions are at the mercy of spur-of-the-moment variables. A hungry shopper is more likely to buy more food than they might actually need and to justify the purchase.

One way to curb impulse spending is to plan ahead. A shopping list isn’t enough. Create a budget to ensure that you don’t spend more money than you expect to spend. Some shoppers only carry the exact expected cash amounts on them, so even if they're tempted to splurge, they literally don’t have enough money to indulge their impulses.

2. Not Budgeting

Lack of budgeting is another reason why people overspend the way they do. A 2016 study by US Bank found that only 41 percent of Americans use a monthly budget to stay on track with their household expenses, meaning that the majority of the population who don’t use a budget might not know how much they spend on food, entertainment, and other things. As a result, they might not know if they are spending too much.

Without a budget, many people make the mistake of eating out more than they can afford to or buying items that incrementally push their finances to the brink.

3. Using Credit

Another reason people overspend is that they use credit too often. Using cash when making a purchase is a psychologically proven, surefire way of being made very aware of how much money you’re parting with, a phenomenon of consumer behavior known as “the pain of payment.” But when paying by credit, many consumers often don’t even look at the receipt before signing their name.

A researcher at the University of Toronto found that people who have a history of paying with credit cards tend to overspend to a greater degree than those who paid for their purchases with cash or check. Another study saw researchers asking 30 participants to predict their credit card balance for that month, and all 30 participants estimated incorrectly, undershooting by 30 percent.

Experts recommend that consumers never use more than 33 percent of their credit limit and save their credit cards for emergencies or big purchases only.

4. Underestimating Expenses

People often overspend because they underestimate small expenses. It’s easier to keep mental tally of big monthly expenses, like rent, car payments, and utilities. But a big contributor to overspending is the little stuff, like eating out, buying coffee or snacks, or even paying online for media content without even getting up from the couch (compared to going out for a movie, which mentally registers as an expense).

This is another area where creating a budget, especially for innocuous “minor” expenses, can prevent you from hemorrhaging money for things that tend to fall through the cracks.

5. Insufficient Savings

Most people don’t have enough money in their savings, and this is another reason why overspending is such a problem. A 2019 survey from Bankrate found that 20% of Americans do not have a savings account, and 21% of people put less than 5% of their income into savings.

This means that whenever an emergency strikes — car trouble, a health problem, unexpected home repairs, a family crisis — too many people have to use a credit card or take out a loan. They’re forced to overspend, using money they don’t have or can ill-afford to use.

Economists recommend putting 10% of your take-home pay into a savings account every month. Doing this every month for a year means that, by the end of the year, you’d have the equivalent of a full month’s salary on standby for an unexpected expense.

6. Peer Pressure

For some people, overspending is insidious. People are social creatures, and it can be hard to say no to invitations to drinks, dinner, or events, or to dress up outside your budget.

One way to curb this particular way that overspending becomes a habit is to share your financial goals with friends who will understand where you’re coming from. In fact, many social circles have arisen around helping people maintain financial accountability.

7. Normalizing Debt

Stemming from this way of overspending is the degree to which being in debt has become normalized, even praised. Some research has suggested that among people between the ages of 18 to 27, having credit card and student loan debt was associated with higher self-esteem.

There has been a widespread economic and psychological assumption that everybody is “supposed” to have debt because incurring debt is seen as a sign of social advancement. Indeed, “Debt is a part of life,” said CNBC in 2019. Being in debt doesn’t mean that you’re bad with money. In the 21st century, it is the cost of investing in your future.

While that is true, it also lures people into the trap of adding to their debt and overspending. As much as people up to the age of 27 felt that taking on debt was a sign that they were moving upward in life, older Americans did not share that optimism when they realized that they could be paying off their debt for the rest of their lives.

How to Overcome Overspending

There are many ways, big and small, that people overspend. Fortunately, there are a number of methods to overcome the temptation to overspend or the seeming inevitability of overspending.

As mentioned above, the best way to control your spending is to create a budget and track your expenses. Whether by using an app or old-fashioned pen and paper, monitor your expenses for a couple of months, keep all your receipts and statements, and develop a keen awareness of where your money goes. Categorize every dollar into savings, groceries, utilities, car, entertainment, or any other categories you deem necessary.

Develop a system where you can easily track your actual net income for a month, how much you spent in total, what your checking account balance is, and whether your expenses exceed your income (and if so, by how much). Keeping this practice for a few months will likely drastically curb any overspending impulses or traps you may have.

Overspending isn’t always about giving in to temptation. Maybe you lost hours at work, or you outright lost your job. Maybe you had a medical emergency that forced you to use your credit card. Sometimes, overspending is necessary to meet your immediate needs. If this is the case, look at financial assistance services for resources like rent relief, legal aid, food assistance, and medical expenses.

Experian explains that other methods of cutting down on overspending include lifestyle changes, like using your (free) library card instead of monthly subscriptions to Netflix, Hulu, HBO, Spotify, or dozens of other streaming platforms. Online cooking classes (free on YouTube) can save you more money than ordering takeout. Going for a run can save you money on a monthly gym membership.

Tracking & Flexibility

Track your progress by using a mobile banking app, a financial planning app, or simply a handwritten budget.

We know the more aware you are of money coming in and money going out, the better control you’ll have over your spending habits. That’s why Current offers free budgeting and spending insights to our members. Our money tracking tools are available right on the homescreen of the Current app and we even send you instant spending notifications every time your card is swiped, allowing for more visibility as well as security to monitor suspicious activity.

Finally, be flexible. Life can change very quickly. The whole point of controlling overspending isn’t to eliminate financial emergencies but to put you in a better position to deal with them, in ways that don’t involve throwing your credit card at the problem. Budgeting, planning, and structuring your finances will help you overcome the impulse to overspend the next time you're in a bind.


References

POPAI: 76% of Decisions Made In-Store. (May 2012). Supermarket News.

Nearly 3 in 5 Americans Are Making This Huge Financial Mistake. (October 2016). CNN.

How to Get Your Spending Under Control. (November 2020). Forbes.

Don’t Numb ‘The Pain of Paying,’ Says Expert—Use It to Help You. (August 2019). Grow.

Do Credit Cards Encourage Overspending? (May 2020). CPA Practice Advisor.

Nine Budget Expenses You’re Underestimating. (July 2011). The Globe and Mail.

A Growing Percentage of Americans Have No Emergency Savings Whatsoever. (July 2019). Bankrate.

7 Signs Your Friends Are Too Expensive for You. (September 2019). Business Insider.

How to Stop Obsessing Over Your Debt, According to Experts. (December 2019). CNBC.

How to Create a Budget in 5 Steps. (January 2021). CNBC.

How to Avoid Overspending Each Month. (March 2021). Experian.

10 Best Expense Tracker Apps. (May 2021). US News & World Report.

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