Overspending isn’t always a bad thing. Everyone deserves to treat themselves and their loved ones once in a while. Sometimes overspending can’t be helped, like when the washing machine breaks or when your car urgently needs replacing.
However, when done on a regular basis, overspending can have a massive impact on your financial security and lifestyle.
According to the Office for National Statistics, 35% of households in the UK overspend. In another study of fifteen European countries, data from ten of the countries showed the amount of disposable income is outweighed by the level of household indebtedness.
There are various consequences that come with spending beyond your means. You’re less likely to meet your financial goals if you consistently overspend. You could also end up getting yourself into debt if you can’t repay your credit card or loans on time.
In this article, we’ll look at the reasons why people often overspend and how these factors can lead to financial difficulty.
Top Reasons People Overspend
1. Lack of self-discipline
You may not be able to stop yourself from buying items that you don’t need or that are outside your budget. Whereas someone with good self-control may decide against a meal out at the end of the month because they know they can’t afford it, someone with little self-discipline might book a table anyway.
You may have the best intentions, but it’s very easy to lose your willpower when faced with different circumstances and shiny new products. It’s hard to turn down your friends when they invite you out with them or when you are faced with your favourite items in the supermarket.
2. Impulse buying
Companies want you to buy from them as much as possible, so they do everything in their power to make their products look and sound as good as they can. This can lead to impulse buying if you aren’t able to say no to an offer, even if you can’t afford it.
Consumers often fail to think about alternative ways that they should spend their money when faced with temptation. This is referred to as opportunity cost neglect. For example, if you spend £100 on a meal, that’s £100 that you can’t put towards your utility bills or your car payments.
There are various marketing and advertising tactics that companies use to convince customers to buy products. You may think you’re getting a good deal, but really you’re only buying the product because the company knew what would appeal to you. If it wasn’t for how the company advertised the product, you might have walked straight past without a second glance.
Many people turn to their phones when they’re bored and scroll through social media or their favourite websites. It’s easy to find your way to an e-commerce site and spend hours researching deals and adding items to your basket.
You might also stumble upon shopping networks when flicking through television channels. It doesn’t take long to become convinced by their advertising spiels and convince yourself that you need to make a purchase. If you channel your time into more productive activities, you may be able to avoid spending money out of sheer boredom.
4. Social pressure
Social pressure can have a major influence on people’s spending habits. If everyone you know is buying a certain brand or style, it can give you a feeling of missing out if you don’t join in. This is a growing issue due to the increase in social media influencers. It’s easier now more than ever to compare yourself to other people and feel like you need to buy items to fit in.
If everyone you know is buying a certain brand of clothing, it’s natural that you’ll want to do the same to fit in. For example, you may end up buying a new pair of expensive jeans because they have a specific label, even though you already own plenty of jeans that are in good condition.
5. Lack of financial literacy
If you don’t know how to manage your personal finances, it’s incredibly hard to budget properly. You likely won’t know how much to save and invest, or how to manage the debt you have. This can lead to overspending on products and services that you should either avoid purchasing or should opt for cheaper alternatives.
Many financial advisors champion the 70-20-10 rule, which recommends you spend 70% of your take-home pay on essentials such as utilities and food, as well as things you want, 20% on special savings accounts and investments and 10% on donations or debt repayments. If you don’t create your own budget, you may be more inclined to overspend and use 80% of your income on things you want and the remaining 20% on essentials and debt repayment.
6. Emotional spending
The phrase ‘retail therapy‘ refers to people who use shopping as a way of making themselves feel better. You can feel instant gratification by making a purchase, which can give you higher self-esteem. However, you could end up spending more than you should in order to chase that high.
You might feel happy when you’re picking out purchases, but when you review how much you’ve spent, this can make you feel worse. However, if you’ve created an allowance for your spending, a splurge here and there won’t necessarily have a long-term effect.
7. Special occasions
When you’ve got a special event coming up, it’s very easy to go overboard. You may find yourself spending more than you planned on presents and parties to celebrate. Christmas is a typically expensive time for most households, as are birthdays and anniversaries. Holidays abroad can also be pricey, especially if you plan to go on excursions and dine out while there.
Special events don’t happen all the time, so most people are inclined to spend a large sum of money. It’s easy to lose track of how much you’ve already spent or to splash out on luxury items due to the exceptional circumstances. If you haven’t set a spending limit, you might feel inclined to choose more expensive options when cheaper alternatives would do.
8. Advertising and marketing
Many different advertising and marketing tactics actively encourage you to overspend. Companies create false needs and desires based on their consumer behaviour analysis. This can make you feel like you must make a purchase, even if you don’t actually need the products. The companies play on your pain points and potentially create false desires to make you feel like you’ll miss out if you don’t buy from them.
Consumers have a ‘loss aversion‘ which means that they fear missing out on a good deal. It’s this mentality that makes Black Friday so popular — customers don’t want to feel as if they’ve missed out on an offer, so they rush to stores to find ‘bargains’. It’s why customers will often buy a product because it’s on sale, even if they never intended to make the purchase before they saw the item advertised.
9. Mis-use of credit cards
When you spend money on a credit card, it can feel as if you’re not actually spending ‘real’ money. The funds aren’t being taken directly out of your bank account, and you’re not handing over physical cash. This illusion can encourage you to spend more than you should because you forget that you’ll have to pay your credit card balance. The cost can also increase if you can’t afford to pay back the money and are charged interest on top.
You could end up paying more with your credit card than you would if you used your debit card or cash. With the latter two options, you’re limited by the amount of money you actually have. With credit cards, you are almost encouraged to overspend because you’re borrowing money rather than spending the funds you have on hand.
Oniomania is a recognised disorder that leaves people with the uncontrollable impulse to buy things. Even though you know you shouldn’t, the disorder can cause people to spend so much money that they can go bankrupt or put their families in financial jeopardy.
There are various avenues where you can seek help if you suffer from the disorder or any other type of addiction that causes you to overspend compulsively. You could try talking to family and friends to see if they can help. Psychotherapy can also help you to understand the root of your addiction, while financial counsellors could advise you on strategies to cope with, restrict and overcome overspending.
People spend too much money for various reasons, from social media influences and advertising campaigns to addictions and a lack of financial literacy. If you don’t plan ahead, you could end up overspending to the extent that you accrue a large amount of debt.
Overspending every so often can be a positive thing. It can boost your mood and lower your stress levels. However, it’s very easy to fall into bad habits on a regular basis and potentially cause you and your family financial difficulties.
If you are struggling to control your finances, then check out our guide on how to stop overspending.