Inside the psychology of overspending and how to stop

Financial stability comes from following the basics of personal finance, like creating a budget, but there’s also an emotional element in attitudes and decision-making around money. One common financial challenge, overspending, can be eliminated with a combination of practical strategies and emotional understanding.

“People need to deal with the psychological side of money as well as the economic and financial side,” says Elizabeth Dunn, professor at the University of British Columbia and chief science officer at Happy Money. “People often have a lot of stress and baggage around money. Before we start talking about interest rates, let’s deal with all of the feelings and stress and issues that might be swirling around.”

Overspending can be defined as spending beyond one’s means, possibly due to a sudden event, like a job loss, or a slow evolution of financial behaviors. According to a recent Federal Reserve report, more than one-fourth of adults surveyed in 2020 had one or more bills that they were unable to pay in full that month or were one $400 financial setback away from being unable to pay them.

Overspending can also take other forms across families and lifestyles.

“I think about overspending as being about not just spending more than your means but where those sources of suboptimal spending decisions are creeping in,” Dunn says. “It’s those kinds of purchases that aren’t providing a lot in the way of happiness.”

Why We Overspend

While every individual’s spending habits are unique to his or her circumstances, Shari Greco Reiches, co-founder, principal and chief visionary officer at Rappaport Reiches Capital Management in Illinois, says a few common issues tend to be responsible for overspending.

Lifestyle creep, for example, occurs when individuals gradually increase their spending over time and often accounts for unrecognized overspending. Individuals that lack a decision-making process for making purchases can also find it difficult to control their spending.

[See: 10 Best Expense Tracker Apps.]

“You always think the next rung is going to make you happy, and if you don’t identify that early it can really be a slippery slope,” Greco Reiches says. “The people who tend to overspend have no decision process, and a budget is the first step with that.”

Media, advertisements and social pressure can also contribute to overspending. Marketing strategies aim to create a feeling of scarcity for consumers with phrases like “almost sold out” or “two tickets remaining” when making online purchases. Emails from favorite retailers can give consumers the impression that they are saving money by taking advantage of a sale, and roadside billboards can lead individuals to make impulsive purchases.

Greco Reiches says social pressures to enjoy dinners out and vacations with family and friends may be magnified for younger people, who see others enjoying these activities through social media platforms like Instagram.

“People think spending makes you happy,” Greco Reiches says. “But for many people, it’s these values of being true to yourself that make you happy.”

[Read: How to Make a Budget — and Stick to It.]

Strategies to Stop Overspending

Tackling an overspending problem should start in bite-size pieces, Dunn says. Small, manageable changes over time are more likely to stick in the long run. Instead of relying on willpower alone, setting specific goals and establishing a foundation 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 limit overspending or increase saving:

— Use a retirement savings projection plan.

— Plan purchases with a shopping list.

— Consider why you are pursuing the goal.

— Pay with cash as opposed to cards.

— Track weekly saving deposits.

— Use a savings account with no early withdrawals.

— Keep budgets for shopping trips.

— Anticipate future regret over purchases.

— Set specific saving goals.

— Keep cash in bills in general.

— Keep cash specifically in large denomination bills.

— Make money hard to access.

[Read: 10 Smart Ways to Spend $1,000.]

The study notes that, “Failures in self-control in the financial domain can have dire consequences. Financial security predicts overall quality of life and subjective well-being, whereas financial stress has been linked to physical health struggles, problems in close relationships, and stress in retirement.”

To avoid these outcomes, start tracking your spending closely and reflect on each purchase. Consider why you spent what you did, where it was spent and how that purchase made you feel.

“It’s really important to pay attention to how purchases affect your own mood.” Dunn says. “Adopting a mindfulness approach can help you get more joy from your spending.”

More from U.S. News

How Much You Should Save by Month and by Age

The Best Free Budgeting Tools

Budgeting Templates to Take Control of Your Money

Inside the Psychology of Overspending and How to Stop originally appeared on usnews.com

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