A Guide to Never Overspending Again
Dear Rich Lifer,
I’m willing to bet you’ve made a few questionable purchases in your life.
That set of TaylorMade golf clubs sitting unused in your garage.
That Schwinn road bike you said you’d ride to work…
Don’t feel bad, you’re in good company.
My question, however, is why do we buy things we know we shouldn’t? Or worse, we can’t afford?
Last year, U.S. consumer debt hit levels beyond what we saw in the 2008 financial crisis, topping 14 trillion dollars.
The average American now has about $38,000 in personal debt, excluding home mortgages. That’s up almost $1,000 from a year ago and a quarter of that debt is directly from credit card charges.
I’m all for finding ways to save you money, get out of debt, and make you more money. But equally important to managing your money is understanding why you spend it.
And I don’t mean tracking where your money goes. I’m talking about the psychology behind what’s driving you to spend, or in many cases overspend.
The Psychology of Spending
An interesting study out of the University of Missouri found that people with spending and debt problems tend to share one common trait:
They have unrealistic expectations for how material things will make their life better.
Study authors, Marsha Richens and Myron Watkins, say that people who end up deep in debt typically get there because they expected “unreasonable degrees of change in their lives from their purchases.”
The study found four types of unrealistic expectations common to overspenders.
What was interesting is these expectations are not as common in consumers without debt problems. Which leads us to believe there could be some predisposition to uncontrolled spending.
This flies in the face of a lot of what’s being taught today in personal finance.
Yes, there are things within your control, but there are things that are outside your grasp that you need to learn to deal with.
While you can’t stop irrational impulses from happening, you can become aware of them after the fact so you’re better prepared next time.
My goal today is to expose you to these mental traps so you don’t keep making the same mistakes with your money.
Here are the four types of unrealistic expectations that lead to overspending.
Expectation 1: People Will Like Me More
Overspenders believe buying things will make it easier to connect with others. In the study, one woman justified buying a bigger house so she could host parties and be more social.
As innocent as that may sound, this is a classic example of irrational behavior being disguised by goodwilled intention.
If you can’t afford to buy a bigger house, don’t. Either you need to find a way to save more money or make do with what you have.
But the real issue here has nothing to do with money…
The fix: Try to understand why you feel disconnected from other people. Where does this approval seeking behavior stem from?
This problem won’t be fixed overnight but if you start addressing the root cause, you’ll stop spending money to make people like you.
Expectation 2: I Will Become A Better Person
A lot of overspenders think spending will make them better people.
Another woman in the study thought that cosmetic dental surgery would improve her appearance, increase her confidence, and help her become more successful.
Again, this line of thinking really has nothing to do with money. To avoid spending, you have to ask why you feel the way you do in the first place.
The fix: Your personal appearance is, well, personal. So it’s difficult to dissociate irrational thoughts when it comes to spending on your looks.
But keep in mind that most people who get cosmetic surgery are happy for the few months following their surgery but then return to the same negative thought patterns, creating a vicious cycle.
Also, what else could you do with that money? Remember there’s opportunity cost whenever you choose to spend.
Expectation 3: I Will Become More Fun
Some people think that they can buy “fun” and fulfillment. One man in the study bought an expensive mountain bike because he thought he’d become more adventurous and interesting.
Sorry to break it to you, but fulfillment is not something for sale nor is having fun. These feelings happen organically and can’t be shortcutted.
The fix: Try new activities under the frame of mind that the activity is what will lead to “fun” or fulfillment, not buying the equipment required to do the activity.
Expectation 4: I Will Become More Effective
Another unrealistic expectation common to overspenders is the belief that a purchase will make them better at a certain pursuit.
Several people in the study said that buying a new car would make them more independent and self-reliant.
The fix: Ask yourself why you’re not as effective as you could be? Does it have to do with the tools at your disposal or is it that you’ve been procrastinating and you’re not fully committed to doing what it takes to improve your position?
Hopefully you see some patterns emerging here. Overspenders don’t really have problems with money per se, they have issues that are more psychological driving their spending.
We’re all susceptible to these unrealistic expectations, myself included. But once you can understand what’s motivating you to spend, then you can decide whether the purchase is worth it or not.
Things like happiness, fulfillment, and connection are rarely things you can buy. So if that’s what you’re chasing, you’re better off leaving your wallet at home.
To a richer life,