Psychology of Overspending and How to Stop

Financial stability comes from following the basics of personal finance, such as creating a budget, but there is also an emotional component to attitudes and making decisions about money. One common financial challenge, excessive spending, can be eliminated with a combination of practical strategies and emotional understanding.
“People need to deal with the psychological aspect of money in addition to the economic and financial aspect,” says Elizabeth Dunn, a professor at the University of British Columbia and chair of science at Happy Money. “People often get a lot of stress and burden around money. Before we start talking about interest rates, let’s deal with all the feelings, stress, and issues that might be going around.”
Excess spending can be defined as spending that is beyond an individual’s means, possibly due to a sudden event, such as job loss, or slow development of financial behaviours. According to a recent Federal Reserve report, more than a quarter of adults surveyed in 2020 had one or more bills they were unable to pay in full that month or were a $400 financial setback away from their inability to pay.
Overspending can also take other forms across families and lifestyles.
“I think overspending is not just about spending beyond your means, but where the sources of suboptimal spending decisions creep in,” Dunn says. “It’s those kinds of purchases that don’t get much in the way of happiness.”
Why do we overspend?
While everyone’s spending habits are unique to their circumstances, says Shari Jericho Reiches, co-founder, director and visionary director at Rappaport Reiches Capital Management in Illinois, some common problems tend to be responsible for overspending.
Lifestyle creep occurs, for example, when individuals gradually increase their spending over time and this is often responsible for unacknowledged excessive spending. Individuals who lack the decision-making process to make purchases may also find it difficult to control their spending.
“You always think that the next degree will make you happy, and if you don’t set it early it can really be a slippery slope,” says Greco Reiches. “People who tend to overspend don’t have a decision-making process, and a budget is the first step in that.”
Media, advertising, and social pressure can also contribute to increased spending. Marketing strategies aim to create a sense of scarcity in consumers with phrases such as “almost out of stock” or “two tickets left” when making online purchases. Emails from favorite retailers can give consumers the impression that they are saving money by taking advantage of the sale, and roadside billboards can lead individuals to make reckless purchases.
Greco Reiches says the social pressures to enjoy dinners and vacations with family and friends may be magnified by young people, who see others enjoying these activities through social media platforms such as Instagram.
“People think spending makes you happy,” says Greco Reiches. “But for many people, it’s those values ​​of being true to yourself that make you happy.”
Strategies to stop overspending
Addressing the problem of overspending, Dunn says, must start in small pieces. Small, manageable changes over time are more likely to persist in the long term. Rather than relying on willpower alone, setting specific goals and creating an organization with an emergency fund and budget may be more effective.
A 2021 analysis found that these financial self-control strategies were successful in helping individuals reduce excess spending or increase saving:
Use a retirement savings forecast plan.
Purchase plan with shopping list.
Consider why you are going after the goal.
Pay with cash instead of cards.
Track weekly savings deposits.
Use a savings account without early withdrawals.
Keep budgets for shopping trips.
Expect future regrets on purchases.
Set specific savings goals.
Keep cash in bills in general.
Keep the cash specifically in large class bonds.
Earning money is hard to reach.
The study notes that, “Failure to control financial self-control can have serious consequences. Financial security predicts overall quality of life and subjective well-being, while financial stress has been linked to physical health struggles, problems in close relationships, and stress in retirement.”
To avoid these consequences, start tracking your spending closely and think about every purchase. Consider why you spent what you did, where it was spent and how you felt about that purchase.
“It’s really important to pay attention to how purchases affect your mood.” Dunn says. “A mindfulness approach can help you get more pleasure from your spending.”