Why Do People Spend More Than They Earn?

Why is it that the #1 re-occurring theme in the personal finance community is addressing how to eradicate debt due to overspending?  What is it that makes a rational person spend more than their income allows?

If you have $5 bucks in your hand for a Subway sandwich, how do you go to Morton’s Steakhouse and borrow $35 to buy a $40 rib-eye?  If you make $50,000 a year, why would you buy a $50,000 BMW with a $45,000 loan?  After overhearing what a father told his daughter at the Porsche dealer this weekend (it was on the way home), I have a feeling spending irrationally starts when we are kids.

The father was at the dealership looking for a new $110,000 Porsche 911 Carrera S Cabriolet.  The father’s 2001 Porsche 911 was getting old, and after speaking to the sales person, they agreed to not trade the car in, but instead hand the Porsche down to the client’s daughter! Can you imagine a 16 year old girl driving a 2001 Porsche 911 as a sophomore in high school?  Her financial senses will literally be warped with entitlement for the rest of her life.

Probability says she will unlikely make over $400,000 a year to afford a second hand Porsche based on the 1/10th rule.  However, since she feels entitled, it’s likely she’ll go deep into debt to consume what she feels she deserves.  It’s not like she’s going to start suddenly wanting to drive an old Civic!

Besides parental upbringing, another theory that’s plausible is the desire to spend to make up for one’s short comings.  You see it with men and cars, and women with clothes all the time.  Overspending on fancy houses has been a common phenomenon since Kings lived in castles.  Hence, one could conclude that those who have jobs, but still have spending problems suffer from low self-esteem.

If low self-esteem is the reason for overspending, then to help our loved ones, perhaps we should recommend a good life coach or psychologist.  Stuart Smalley’s said it best, “I’m good enough, I’m smart enough, and doggone it, people like me.” Who cares what people think folks?

The final theory on why people spend more than they earn is that overspenders are delusional and believe they will make more money in the future than reality.  With the belief that more income is on the way, people spend into their psychosis, but only wake up to reality when debt starts crushing them.  Sometimes we just have to recognize we’ll never make a million bucks a year, and that’s ok.  Our lack of affordability should motivate us to make more money so we never have to overspend again.


We at Financial Samurai ask the Banks of Mom and Dad’s not to spoil their children.  Just love them with free hugs and positive support.  Your kids may unwillingly influence others to overspend because others will mistakenly conclude that if your kids can afford X, so can they.  For people with debt problems due to their own doing,  before you buy another unnecessary item, pay off your debt.  Buying things while you still have debt is irrational. Furthermore, who cares what other people think about you.  Your true friends and family are all that matter and will love you no matter what.

Readers, what are your thoughts on why people spend more than their income?  Do you agree or disagree with these three theories?  We really needs to understand why people spend more than they earn before we can help.  But, even if we do understand, isn’t the straight forward solution to just stop spending more than one earns?

If there’s a cup that’s labeled “poison”, would you drink it?  If the employer you covet requires you to speak conversational Spanish, wouldn’t you learn?  If the girl or boy you want to marry told you to stop going to shady places with your buddies, would you not listen?  Please tell us what we’re missing.

Related Post:

“Bank of Mom & Dad – Should We Spoil Our Children?”

“The Dumpster Of Treasure”

“Why Do So Many NFL Players Go Bankrupt?”


Financial Samurai

“Slicing Through Money’s Mysteries”

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. says

    Back in 2007, I made more than I ever made in my life. I thought I’d earn at least +/- 25% of what I made in 2007, but all went to hell in 2008, and my earnings declined 50%. Too late for me though, b/c I had already bought this luxurious vacation property in Maui. I got a 10% discount from the peak, price prices fell further by 15%, and my income halved.

    So yes, I was delusional in thinking that I could continue making close to my peak level income in 2007 and spent accordingly. I never plan to sell the Hawaiian place, but my timing wasn’t perfect. That said, I’m still young, and expect/hope my peak earning years are still ahead of me!

  2. says

    “Probability says she will unlikely make over $400,000 a year to afford a second hand Porsche based on the 1/10th rule. However, since she feels entitled, it’s likely she’ll go deep into debt to consume what she feels she deserves. It’s not like she’s going to start suddenly wanting to drive an old Civic!”

    You make a good point. I had a friend in high school who drove a Lexus, brand new courtesy of her dad. She was a great girl – super nice and a great friend. But she knew it as well as I did that this car is going to ruin the rest of car-purchasing life. She knew that she would have a hard time buying something that was considerably “worse” than that Lexus.

    Now, I think it’s appropriate to buy your child a car if they need it to get to school (I went to high school 17 miles from my house). But we shared our car and it was a hand-me-down not worth more than a couple thousand. That was fine, though, because it made it much easier to think our $5,000 and $8,000 we bought a couple years later was an amazing purchase (we both paid cash for them!). But if my dad had given us some hand-me-down Porsche to drive wow….not sure what I would do after that.

    • says

      Seriously David, what is she going to buy after the Porsche, a Lamborghini?! One of the greatest feelings I know is being about to save up for something successfully, and then buy it on your own. Things just don’t seem as cherishable if it wasn’t earned.

      If I were the girl, I’d try and come up with a compromise. Perhaps something a little less ostentatious so people wouldn’t pick on me, and ask for some of the savings in the form of cash for here to do what she wants. Sure, it’d be tempting to accept the Porsche, since so much about HS is trying to be cool, but I donno. Seems over the top to me.

  3. TonyM @ leavingfinance.com says

    Interesting reading. I agree with David. When I started driving, my Dad gave me a car. Only it was a very old Ford Fiesta. And I had to share it with my sis. But the truth is I loved that little thing. Even got chased by a random car for some odd reason and managed to get away. Was a crowing achievement. Its all about the driver behind the wheel!!

  4. says

    That’s the low, when you get cash from your paycheck, you find so quickly the way to spend it all. The circle repeats again and the consumer basket is always empty. That’s all folks.

  5. George@Moneylounge.net says

    Getting your first car is definitely a big moment in your life. Handing down an expensive Porsche is setting the bar way too high. I wonder how distorted the girl’s views are on finances, if any, considering her dad is just willing to hand down the Porsche like that. What other extravagant things is she getting?

    • says

      Yes, I agree. Distortion is strong with this young one. The other side of the story is, if the father is rich enough, and will always support her, then maybe her her view on finances aren’t distorted!

  6. Jim777 says

    Everyone I know looks at saving money as being pessimistic. (Well not since 2008 but before that) If you SAVE, then you must think your going to loose your job. Yes I’m serious. At work you’ll notice that if you go out and buy a Brand New Car everyone will congratulate you and act like you did something wonderful… I just shake my head and think to myself; there goes another fool who went in debt for a new car when they could have bought used and saved a ton of money.

    Americans have always been addicted to SPENDING and Showing Off their income. They care more about how they LOOK than their real financial situation. You can be sitting with $107.00 in your bank account but as long as you have that shiny new car sitting out in front of your mortgaged house then your doing A-OK Great in America… Please.

    One great thing about the Recession of 2008, it’s starting to bring Americans back to reality. The Buzz of the Roaring 1990’s spending party is finally wearing off and people are realizing they better get real and stop lying to themselves.

    • says

      Hi Jim – You are spot on. Welcome back to reality me, Americans, and the rest of the world! This downturn will make all survivors better in the long run. Thnx for sharing your thoughts!

  7. says

    Sam, I found this article while searching on Google. I loved this part:

    Stuart Smalley’s said it best, “I’m good enough, I’m smart enough, and doggone it, people like me.” Who cares what people think folks?

    Thanks for pointing out this problem so well. I actually had an overspending problem until I wised up in my older years, so I can definitely see a problem with a sense of entitlement and a lack of education.

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