As a personal finance blogger, it frustrates me that some people consistently spend more than they earn and then complain why they can’t build wealth. Uncontrolled debt can quickly spiral you into bankruptcy. Control your spending!
Yet, this doesn’t scare people enough to stop their overspending habits. And it’s not just hoodlums that spend more than they earn. Even good people can get caught up into habitual overspending too.
One of my friends is an overspender. Nancy is 28 and has a bubbly personality. Every time we catch up for a drink, it’s funny to see the guys and girls all stare at her. The guys look at her and think, Dayum!
And then they look over to me and think, What the hell?! The girls on the other hand just check out Nancy from head to toe and don’t even pay me any attention. Long straight hair, longer legs, and delicate features does that to people I guess.
I’ve known Nancy since she first graduated from college. She reached out through our college alumni network for work advice. Although she didn’t make it past the third interview at my old firm, I did give her some tips and introduced her to other personnel that eventually led to another job. We kept in touch and became friends.
Many Insecure People Spend More Than They Earn
As attractive as she is, Nancy revealed to me that she feels ugly. Do you know those already stick thin folks who consistently tell their friends they need to go on a diet? Nancy is somewhat like that with her looks.
With her insecurity, Nancy ends up buying some of the most expensive clothes and accessories on the planet. The LV handbag she carried the last time we met cost over $3,500 alone!
I guess with a $6,500 a month gross salary, she can afford it. But, what about the 25 handbags she admitted to already owning? As we talked more, she told me she has over $25,000 in credit card debt and feels the only way out is to open up new 0% balance transfer credit cards to prevent her from getting into more debt.
It was a strange conversation because clearly, the best way to get out of debt is to not spend more money. However, to Nancy she felt stuck in a negative debt cycle where spending made her feel beautiful, if only for a little while until she had to spend some more.
Why People Spend More Than They Make
There are six main reasons why people consistently spend more than they earn.
Self-Esteem
When we lack self-esteem, we turn to things that make us feel better about ourselves. Shopping to fill an inner void can easily cause people to spend more than they earn. In Nancy’s case, clothes and accessories made her feel pretty and therefore she continued to spend to keep herself temporarily happy.
We are bombarded on a daily basis by how society thinks we should look and dress. The fact of the matter is the TV and movie industries purposefully choose the most attractive people who barely exist in our daily lives. When all you see is someone really attractive, really wealthy, or even really good, it’s inevitable we start feeling inadequate.
Related: The Desire For Money Prestige Is Ruining Your Life
Desire
Another super common reason why people consistently spend more than they earn is desire. Desire leads to suffering, but most people don’t realize this.
When I was 10 years old, I finally got a pair of $40 Reebok tennis shoes I begged my father for so long. I thanked him profusely and told him I can’t believe people spend so much on shoes so regularly.
He then said, $40 shoes have always been around. There are $100 and over shoes too! I realized then that desire is never ending if you don’t draw a line and cut things off.
Financially successful people do not spend more than they earn because they prioritize maintaining financial freedom and independence. They don’t let desires for material things steer them off course from growing wealth, investing, and planning for retirement.
Keeping up with others
It used to be that you’d see your neighbor’s new car and want to buy a new car yourself. Trying to keep up with the Joneses is another big reason people spend more than they earn. Now with Social Media, you get to keep track of all your friend’s great lives. You know, the updates from the Maldives, or skydiving in Spain.
We’re now bombarded more than ever by people who want to share with us how great their lives are. As a result, we need to do the same, or else we start feeling inadequate. The best thing to do is to shutdown the constant checking and reflect on what you already have.
Lack of knowledge
People don’t realize how expensive consumer debt can be. With mortgage interest rates falling to record lows, it’s a curiosity to see credit card interest rates still average in the high teens!
If you pay a 15% credit card rate and pay the minimum each month, your credit card debt will double in five years! And if you pay a 20% interest rate, then expect a doubling of debt in only 3.5 years.
The miracle of compounding works equally as well in reverse. There are people who don’t realize that if you pay $500 off your $1,000 credit card bill on the last day, the credit card company will still charge you the one month interest on your entire $1,000 balance. Know the rules consumers!
Easy credit
Despite income inequality, there is social equality. Anybody with a pulse can get a credit card with a thousand dollars line of credit nowadays.
Heck, credit card companies are marketing their cards to students who most don’t even have a steady income! If there is a plate of French Cruller donuts, I guarantee you that I will eat at least one. Easy credit leads to problems and definitely tempts people to spend more than they earn.
No budget
Anyone who doesn’t want to spend more than they earn benefits from a budget. If you don’t know how much you make after taxes and retirement contributions, then you don’t know how much you can spend.
You’d be surprised how few people actually sit down to make a budget. Sure, the first budget may be a PITA to do, but afterward, everything becomes much more automatic. To improve your finances, grow your wealth, and stop overspending, you have to know how much money is coming in and make sure less is going out.
Logic Is Not Enough
Everybody except for the government knows that spending more than you make for an extended period of time leads to financial failure. Yet, there are trillions of dollars in revolving consumer debt outstanding. Life is too easy in developed countries. We become soft, indebted, and lazy, just as creditors want us to be.
If you go to India, where microlending is becoming big business, research what their default rates are compared to the US. Default rates are way below industry norms because each person recognizes how difficult it is to get credit. In addition, they cherish the credit for a better life, and do not want to disappoint their villages which are depending on such loans and future loans!
People Who Spend More Than They Earn Can Change
Bad habits are hard to break, but it’s not impossible. If you or someone you care about has an overspending problem, I have a vast archive of budgeting and savings articles that can help you get your finances back on track.
A first step to change is to understand how good we have it. Do you really need a fourth pair of designer jeans or a new car every three years when the majority of the world can’t even afford to pay cash for the typical $21,000 Honda Civic?
If we can visit developing countries to gain more perspective how luxurious our lives are in developed countries, I’m positive we will be able to reduce the act of spending more than we make significantly.
Imagine a world where nobody welched on their bills because they reached their financial tipping point? There would be no housing crisis, no financial crisis, and no need to risk our respective country’s economic futures.
Further Reading
- An Untraditional Roadmap To Financial Success In Your 20s
- Curse You Bank Fees! How To Never Pay Sneaky Bank Fees Again
- Can You Blow Through $100,000 Like A Rock Star?
- How Much Savings Should I Have Accumulated By Age?
Recommendations To Build Wealth
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Control your spending. The more you can, the sooner you can reach financial freedom.
Salary is not big enough to cover basic needs. I am in debt over 25,000 with credit cards and guess what i don’t buy anything fancy. Student Loan, food, rent and spendings for weddings just added to it. Most people do more spending because they need to satisfy very basic needs. Going to dentist to fix a tooth costed me $700 here where in Europe you can do it for $20. Are you telling me i am over spending because i had to fix my tooth. Fuck that. We are not all born rich and i have bachelor degree in two areas and it seems what i make is a joke, i regret going to school.
I don’t have iPad and any shit people mentioned above. In this country people are not paid enough.
Thoughts on finding a second job or getting more comprehensive insurance?
I began this site as a second job and worked on it for 25 hours a week for three years while working a 50 hour a week job.
Spending for a wedding ? People do not know how to cut expenses?, but they know how to complain. A good start is by not having a wedding. Get married privately. Drive an economic car, small, it’s cheaper in every aspect. Trust me. Cook at home, cheaper. Carry your own lunch. Stop going to bars and restaurants so often. Look at your income and sit down to write a budget. Shop for groceries at Walmart. Shake off that ego! Being solvent and independent is far more rewarding than having to work later in life because you are a slave to a standard of life you cannot afford. Having debt is not a good thing. Avoid it like the plague.
Iam from India In my childhood days i got only 3 pairs of clothes for a year. buying new clothes a dream at that time. people were very happy and enjoy their life at that time. now majority of the indians affordable to buy premium items. but they are not happy. depressive chasing endless pleasures. we cant expect apple tree from a marijuana seed. marijuana seed is our ego. if we cant win our self we endedup as a useless things. thanks for this article. sorry for my english.
So you aren’t going to buy the iPhone 5 to help us out in the Bay Area? Our economy needs you! The rich need you, just like everyone needs the IP5!
Google already is at $700/share and a monopoly. Come on now! :)
On the bright side, at least it feels good spending money you don’t have, until it doesn’t right? Otherwise, people wouldn’t do it.
Due to the nature of my husband’s career, I am required to accompany him for many social and charitable events – the media is usually present. It is simply astonishing to witness the clothing, shoes and accessories – women are literally trotting around with small fortunes on their backs.
My closet is filled with a variety of tailored classic designer clothes bought at resale shops.
Occasionally, during our travels I’ll pop into a Goodwill if we are in an upscale neighborhood.
Last score was a “day” dress for 2.50 that I washed and hung to dry – paired with a fabulous pair of Ferragamo shoes and matching purse ( bought for a song on eBay) we were off to an event where we had lunch with the Governor. Jewelry was pearl stud earrings (faux)and my 30 year old Cartier tank watch. I would much rather invest my money and continue to support the charities that help those in need than waste it on clothing.
At least at these type of functions, you know you have an original if you’re going to Goodwill and not buying the latest dress at Gucci!
It’s all about education. The reason I say that is I believe we don’t do a good job in the country in educating our children abut personal finance.
Entitlement…the people I know who spend like that often tell me why they deserve whatever item they are overspending on.
Spending is a form of addiction. Incessant surge of ads via new media — mobile phones, iPad etc. is another major factor. Let’s face it, businesses are after weak souls who want to please others at any expense. And there are many weak souls with easy credit fueling their bad habits.
Quite a paradox. We are told to save as much money as we comfortably can yet
the economy needs us to spend,spend,spend to grow, and recover. Just imagine if
everyone in the U.S, put away their VISA’s for a year, and lived on cash alone within
their means.
It likely would be an economic disaster.
Now that’s depressing
I would like everybody to spend like crazy so equities, real asset, and other physical assets can rocket higher. Then I would sell everything and just sit on the beach somewhere and blog. Wait a minute.. this happened in 2007 already and I didn’t have the foresight! Darn.
I often tell my friends who tend to spend too much is that the secret to being able to have financial stability is to live within your means. I absolutely agree with you that social media is one of the main culprits on why people spend more. People tend to buy what they want, even though they don’t need those things. Spending beyond your means would only lead you into a vicious debt cycle that is very hard to get out of.
Thanks for your thoughts Michelle. With positive reinforcement of inexpensive stuff, it makes inexpensive stuff more attractive!
Good meeting you in Denver!
I think many people spend too much because they are depressed and it gives them some short term joy. Unfortunately this overspending only leads to more depression which leads to more spending. It’s quite a downward spiral.