As a personal finance blogger, it frustrates me that some people consistently spend more than they earn. Uncontrolled debt can quickly spiral you into bankruptcy.
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 overspend. Nancy is 28 and attractive. 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.
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.
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!
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.
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.
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Updated for 2021 and beyond.