Whenever we spend more than our income, we are overspending. For some of us, overspending can be almost unconscious—we buy that latte and new shirt and then go out to dinner without adding up the costs in our head, much less on paper. More often than not, we're not even aware of the hole we've dug ourselves into until it's too late. It’s time to reign in the spending and live within our means.
5 Common Reasons for Overspending
Following are five common reasons people overspend—if you recognize any of these, see if you can weed out that behavior from your financial life.
1. Peer pressure. Many people feel pressured by friends to spend money they don’t have. Perhaps your friends want to go grab dinner, see a movie, or buy tickets for a concert. You want to go, but you don't have the money. If you can be honest and live within your means, you'll not only prevent yourself from financial troubles, but you also may find that you've helped others have the courage to make better financial choices for themselves.
2. Want to feel good NOW. Your life is full of stress, obligations, demands, schedules, assignments, and papers that are due. Sometimes you just want a break. You want a reward, so you buy some new clothes and enjoy a night out with your friends. You might feel better for a while—until you get the bill. Better to treat yourself with small, affordable rewards than continue to overspend.
3. Don't have, or ignore, a budget. If you've never set a budget for yourself, you may not have considered the benefits of tracking your spending. Picking up a coffee on the way to class each morning, spontaneously meeting a friend for a movie, or doing some late night online shopping are all activities that can add up quickly. Having a budget makes it easier to know what you can afford, and what you can’t. To get started on creating a budget, click here.
4. Keep up with neighbors and friends. Your buddy has a flat-screen TV? Your friend has a trendy new outfit? We often think we should be able to have everything our friends have, but many times we can't. While we all need rewards and treats once in a while, you'll find a lot more joy in paying for what you can afford than stressing about your upcoming credit card bill.
5. Addictive spending. Just as people become addicted to gambling, alcohol, or cigarettes, a person can become addicted to the emotional high of spending. If you find that you are having problems with spending and debt—if you feel like you can't control your spending or you think a lot about how you can spend money—get help. Debtors Anonymous is a 12-step program for debtors trying to recover from money problems and compulsive debt. If you want to start by figuring out how much you are spending, you can use the How Much Am I Spending online financial calculator.
Overspending = Debt
Unfortunately, overspending typically leads to large amounts of debt. That debt then needs to be repaid—with interest! Consider this example:
New college graduates carry an average credit card balance of $3,000. Let's say you’re lucky—or better yet, careful—and you accumulate only $2,200 in credit card debt. Your interest rate is 18 percent and you pay the minimum amount ($40) each month on your card without any further purchases on your card. How long will it take to pay off your balance? Did you guess five years? Try 10. It will take almost 10 years to pay off the debt. Your total cost will be $4,680 (original balance of $2,200 plus $2,480 in interest).
Your best bet is to get overspending out of your life, so that you can focus on the unavoidable debt you will face in the future. One survey of 21- to 35-year-old college graduates found that this group owes an average of $30,000 in student loans. Although this is a very high number, this kind of debt is considered good debt.
Now you may think … there is such a thing as good debt? Read on so you can distinguish between good debt and bad debt.
- Good debt. Debt incurred to increase your future earnings potential, such as home mortgage debt, student loans, and business loans.
- Bad debt. Debt incurred from items with depreciating assets, such as car loans, and credit card debt.
Your best bet is to keep your day-to-day expenses down and to avoid using a credit card whenever possible—keeping your "bad debt" to a minimum. Additionally, don’t borrow in excess; this will keep your "good debt" in check. When taking out loans to cover your college expenses, or even for your first home, only borrow what you feel confident that you will be able to repay.