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Why Do People Overspend?

/ October 9, 2016

Ever look at your bank account and wonder “Where did it all go?!” Our tendency to break the bank isn’t just learned from our friends and family, it’s hard wired into our psyches. Why is this so?

1. We fail to acknowledge that future income often comes with future expenses!

We are great at imagining future income, but don’t do as good of a job projecting the future expenses associated with it. For example, let’s say a college student decides to buy a car that’s over their budget. Their justification for the purchase is “Oh, I’ll be able to pay this off once I have a full-time job next year.” However, they may fail to anticipate the expected future costs of maintaining it, or even the unrelated future expenses associated with paying off their loans or getting married. How can this mentality be combatted? Set a realistic budget that forces you to spend no more than what you earn or even less than what you earn, enabling you to save regularly.

2. The collapse of willpower!

People who believe that willpower is limited and “comes and goes”, are quick to make more impulsive decisions, such as overspending, eating junk food, and even procrastinating. If you find yourself in this category, why not try rewarding yourself after your hard work by doing something that doesn’t involve spending much: mediating, taking walks, engaging in a sport, etc.

3. Borrowing and saving together creates a false sense of security.

Sometimes in order to achieve a high level of savings, we borrow more than we need. It’s important to understand though that it’s okay to spend, especially if it keeps us from borrowing. A savings plan should allow spending to avoid expensive debt (i.e. huge credit card balance).

4. We think the rising value of our home=wealth!

Psychologically, we often think that the more our house is worth, the more we have to spend! However, the reality is much different, because the only way to access the wealth from our home is to sell it. Even so, a comparable house would have likely gone up in value as well.
Overall, it is vital to be aware of and acknowledge our financial blind spots in order to correct unwanted behaviors such as overspending.

Check out the original article by LPL financial HERE.