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Why Do People Spend More Than They Earn?

Published: 09/16/2009 | Updated: 08/28/2020 by Financial Samurai 13 Comments

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? Why do people spend more than they earn? It’s irrational.

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.

Spending More Than You Earn

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!

Taking Advantage Of Parents

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.

Related: Here’s how much you should have saved by age.

Don’t Spend More Than You Earn

We at Financial Samurai ask the Banks of Mom and Dads 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.

Recommendation: Us a free wealth management tool like Personal Capital to shore up your finances!

Keigu,

Financial Samurai

“Slicing Through Money’s Mysteries”

Ouch! Sam Bradford & New College Academic Polls

Published: 09/06/2009 | Updated: 02/20/2020 by Financial Samurai 7 Comments

Given it’s the weekend, I’m not going to write too much, but two things worth highlighting given it relates to some of our previous posts.

1) Sam Bradford of Oklahoma got injured and his then #3 Oklahoma Sooner’s LOST to BYU (#20).  What does this mean?  He may never play up to his potential again, thereby losing $20,000,000 in guaranteed money by not going to the NFL last year.  Perhaps just as painful, Oklahoma will not be considered to play in the national championships again this year.

Oh well, that’s life.  Who needs the money anyway when you can have so much fun in college and get your degree?  However, all you prospective pro athletes, please feel free to shoot us an e-mail for advice.  We’ll look out for you, even if the Sooner faithful won’t look out for Sam by telling him to stay!

Related Post: “Forgoing $50 Million For The Love Of Football”

2) The September/October issue of Washington Monthly come out with a new type of college ranking.  I thought it was intriguing because they basically bash US News & World Report’s methodology, due to the blatant cheating by some faculty at Clemson and University of Florida to manipulate the results.

Washington Monthly’s believes that “America’s colleges are those that work hardest to help economically disadvantaged students earn the credentials that the job market demands.  They contribute new scientific discoveries, and they emphasize the obligations students have to serve their communities and the nation at large.” Hence, they offer three broad rating categories: Social Mobility, Research, and Service.

The 10 Best Universities in America

1. UC Berkeley (#21 in US News)

2. UC San diego (35)

3. UC Los Angeles (25)

4. Stanford University (4)

5. Texas A&M College Station (64)

6. South Carolina State University (NR)

7. Penn State (470

8. The College of William & Mary (32)

9. University of Texas – Austin (47)

10. UC Davis (44)

Several observations: 1) California schools dominate.  2) There’s only one private school in the Top 10.  3) The traditionally perceived elite schools are not there except for Stanford.  Is spending $50,000/year to go to private school in the east coast worth it?  Hard to say after reading the report!

Related post: “Survey Says: Get 1,300 On Your SATs & A 3.9 GPA And You’re Set for Life!”

Hope everybody is having a great weekend!  Upcoming posts will be about Net Worth, The Right Sports, and How Everything Is Relative.

Related: The Implications Of The College Admissions Scandal

Free Wealth Management

Keiju,

Financial Samurai

Slicing Through Money’s Mysteries

What Will August Bring…….

Published: 07/31/2009 | Updated: 02/20/2020 by Financial Samurai 1 Comment


I had lunch today with one of the co-founders of BuzzLogic to catch up on life and discuss the world of online social media. If you don’t know about BuzzLogic, the company is one of Silicon Valley’s great start ups that got into the blogging world early. BuzzLogic developed a unique technological platform and a fantastic premium display ad network that maximizes the returns of advertisers and publishers alike. If you’re an advertiser or publisher, it’s definitely worth a look.

The funny thing is, my friend and I have been playing poker together for the past couple years, and I had no idea what he did. I just assumed everybody was a poker junky and I did my best to blend in, often times trying to beat the lowest denominator on the dress scale with my raggidy sweats and soiled baseball cap. Perhaps they’d have mercy on me given my appearance, or perhaps they’d smell blood and bulldoze me over! Both strategies have their strengths and weaknesses, but after a while, they all figured out I’m one of the tightest players at the table. At any rate, it just goes to show you how small the world is, so be nice to everyone, especially in a big city.

My friend shared with me many great tips for Financial Samurai, one of which I will implement today. At the end of every month, I will produce an“Editorial Calendar” with a theme for the following month. Given that it’s only a matter of time before the unemployment rate breaches 10% nationwide , many of August’s entries will be related to the intricate world of employment. From interview tips, to maximizing your chances of getting your foot in the door, to getting ahead in your career, I’d like to share some of my strategies and experiences, as well as highlight posts from the personal finance community to analyze and discuss. I’m confident that we can collectively help make a difference.

“How High Can Unemployment Go Before We Derail?”


“To MBA Or Not To MBA”


“Do Rich People Try Harder?”

If readers or publishers have great posts they’ve come across, please feel free to e-mail me or put up in the comment section. Have a wonderful weekend everybody and stay frugal!

Keigu,

Financial Samurai – “Slicing Through Money’s Mysteries”

Survey Says: Get 1,300 on Your SAT’s and a 3.9 GPA And You’re Set For Life!

Published: 07/22/2009 | Updated: 02/20/2020 by Financial Samurai 12 Comments

A very interesting article in the New York Times highlighted PayScale’s survey of 1.2 million college graduates to find out what they made right out of school, and 10 years after graduation. If you look at the picture, it’s interesting to note that the majority of schools are: 1) Private Schools, and 2) Highly Ranked in US News & World Report and other popular college rankings.

The average SAT and GPA scores of these 20 schools are roughly 1,300 and 3.7, respectively. Hence, one could argue that the key to making a six figure income 10 years out of school is simply high test scores and good grades! As such, it behooves all incoming 9th graders to recognize their grades accumulate from 9th to 12th grade, and not to mess their chances up of getting into Dartmouth, UPenn, and Yale.

IN THE LONG RUN

I really used to think education was not very useful since we forget much of what we learn. But, as I grow older, it becomes apparent that many of the most successful people we know have been very well educated. Barack Obama went to Columbia for his BA, and Harvard Law School. George Bush Senior went to Yale, and even Bush Junior went to Harvard. Say what you will, but anybody who becomes the President of the Free World is successful in my eyes. In the long run, the cream rises to the top, be it whip cream or sour cream.

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