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.
Related: Here’s how much you should have saved by age.
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.
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“Slicing Through Money’s Mysteries”