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.
Control Your Spending
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. Money is mental.
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 To Help People Spend Less Money
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. It's the like the YOLO economy is here to stay!
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.
Spending more than you earn is so common for people I know who are my age. It’s just that my generation, which you know I’ve written about before, just has to have everything here and now without waiting or saving. It’s very tough to break the cycle. I often wonder where I would be financially if I didn’t move to Grenada which changed the way I look at the world and my finances forever.
How tough really is it to break the cycle? Why not just cut up the credit card for 6 months, or put it in a safe and be done w/ it?
Of the various factors, I think the most prominent root cause is self esteem. The same credit is available to virtually all Americans, yet only some show lack of restraint. Many people getting into debt know they shouldn’t be doing it, but need to outwardly display success and keep up with the Joneses. If you have a different mindset and don’t give a crap about people judging you, you won’t get into debt.
It is interesting that the same amount of credit is available to everyone, yet only a minority (?) abuse it to the point of being out of control.
With any number big enough, you will have a big enough number of abuses.
I myself have fallen into this trap. When I was in college I would live it up and go out with friends and just put it on my card. I’m paying for it now :( Once I get out of credit card debt (shooting for march) I’m done with credit cards!!
It does feel good to pay down the debt though :)
EXACTLY! It feels good to live it up w/ friends, and it also feels good to pay down debt. A win-win for an optimist! Good luck.
I personally have no clue what its like to spend such a vast amount more than what you have. I am not saying I was always a saint with money cuz I wasn’t but this type of consumption baffles me. I will say though that I have met plenty of people who have done this. When you ask them why, they will say they felt like they had to or they felt some type of validation in the spending. I think your comment about paying $21,000 for the civic was interesting. I personally don’t have the cash on hand to pay it but I wouldn’t consider ever buying new-not after I saw how quickly a new car depreciate its value! Its going to be always old cars for me but out of choice :)
You might want to come to the Dark Side and see what spending more than you have feels like! Just try and control yourself when you get there b/c it might feel so awesome!
I can only speak for myself, but I think we felt that we “deserved” certain things because we made it through school, living with forced frugality due to lack of income, and now we can qualify for credit. Instant gratification is toxic. You’re right than anyone can get credit. We never looked at the cost as a whole, but rather, can we afford the payments? I don’t blame anyone but myself, but I really wish I had learned better money management skills in school or from my parents, although I probably wouldn’t have listened. Sorry it took 12 years to figure it out.
Hi Kim, that is a great attitude “I don’t blame anyone but myself.” Hopefully at least the credit you spent brought joy during that time. It is fun to also get out of debt too, so in that optimistic way… you could have it good both ways!
Definitely some truth to that. Dinner is a great gesture since you would have spent it on hotel costs anyway. Nice job on the auto pay! Maybe I should consider that given I know what my expenses are real well now that I don’t work anymore.
I do enjoy the “you can’t take it with you mentality.”. Besides, if you die with $1 billion in debt, what are they going to do to you?
Becomes a moral issue I guess.
“You can’t take it with you” is true but I am surprised not many think “I want to leave a reasonable sized bequeathment for my kids”. I probably am a minority who thinks I should leave my kids with money even though it means not driving the latest model car or wearing designer shoes all the time.
PS:
I do wear designer shoes, just that I buy them only from clearance sections of stores like TJMaxx and don’t own more than 6 pairs of footwear at any time, office shoes, hiking shoes, sneakers, floaters, flip flops & home-footwear all included :-)
I think you’re exactly right that desire leads to suffering. We really don’t need that much to survive and be happy. One simple essential that I am so grateful to have is access to free, clean bathrooms. May sound silly but after traveling to so many places where you have to pay to get in or simply can’t find one, I am loving how there are so many accessible facilities in the US. Does’t take much to keep me happy.
Ah yes, accessible clean bathrooms are the best!!! When I gotta go, I look for the nearest Four Seasons or Ritz Carlton :)
The big thing that I notice in my situation is that there is a push towards a lifestyle of consumer debt. “Get a job……..you need to get a house……start a family……” is the typical thing that i hear from parents and family. But most of them are saddled with tremendous debts that they are struggling to pay. I think what contributes to the mentality is the culture with having to keep up with the Jones’ or you’ll be left behind. For me, I never really got interested in having to own a lot of things, just enough things to be happy and most people in my life tend to think that is odd that I don’t want to have the life of buying things that I’ll never need.
Even… “get an education”….. which for the cost of college tuition nowadays, just doesn’t seem to be a slam dunk now.
Hi.. newbie here :)
After finishing college, I got a job to avail credit cards and loans. Boom! Then I got married, tamed my retail escapades a bit but still never understood how money works. Now after 10 years from college graduation, I am enlightened – by paying all the debt I accumulated all those years of ignorance.
Ignorance – I was raised in a family that never had a savings account. Father, a musician – yeah, starving artist. Mom – breadwinner who never get to make ends meet. There was no financial literacy at home so I spend what I get, even spend the money I hope to get on next payday.
Welcome Shasha!
If you have kids, I’m sure they will get more financially literacy, and then the positive cycle ensues!
Another reason to avoid Facebook and their ilk.
I used to wonder if I was missing something, but Facebook et al. are just the current Century’s version of navel gazing, albeit in a group setting.
Fortunately, I’d rather put my money in the bank or investments than in frou-frou bling.
Just wait until you get that lovely gf to woo! Then it might be bling, bling all the time!
I think that a lot of people are short sighted when it comes to money and things they want. They see the $2500 bag and say “oh, I can pay that off in 2 years”, but they don’t think about what else they could be doing with that money. Lack of knowledge definitely comes into it, but I think that the “I want what I want when I want” mentality that is all around us is the real cause. People don’t want to wait until they have enough saved up, they want it now. People rationalize purchases and talk themselves into buying things they can’t or shouldn’t afford all the time. I think that people need to start thinking longer term and working to delay their instant gratification urge – it will serve them well in the long run. Just my two cents, great article!
Thx AB. Or, “$2,500 is cheap compared to the $6,000 Hermes Grace Kelly!”
My wife has a tendency to look at other women’s purses and tell you if it’s real or fake. These are $2500 LV bags and give her a judgment if they’re doing well. The problem is anyone can afford that, even the minimum wage person who lives at home. She loves LV and before we got married she loved the comments people made when she got a new bag. How long does that last? Add up all the comments and that amounts to an hours worth. How many hours do you need to work to get a $2000 bag to get an hour of compliments?
Real wealth and success is often not visible, (investment accounts, high cash savings, muni bonds etc.) I was watching a JA Rule interview and someone asked him why he would pay $250,000 for a bracelet, and he said you can’t wear a bank statement to show how much you got out, but you can wear a bracelet. Priceless financial advise on NOT what to do.
JArule makes a good point! Ha!
So onto your wife…. Does she still buy them $2,000 LV handbags? Or does se have enough? Is you commenting on her bag or beauty not enough?
She hasn’t bought a bag due to us recently buying a house. Moving expenses,
furnishings and things for the house adds up so we’re a bit low on funds.
We bought a house in Kailua on Oahu, where I believe you wanted to eventually
move to.
I knew I was in trouble before we got married when we went bag shopping and I was
expecting a rack full of bags. Instead my wife likes those bags that has its own shelf
with a spotlight on it. LV is my nemesis.
Hahaha, nice. Well, if you are able to buy a house in Kailua, life ain’t so bad! I’ve got to check out your blog more!
I go back to Honolulu a lot. Maybe even end of this month or October. We should get some grub if so! I’m closer to the South Side Diamond Head area.
Next time you’re in Hawaii drop me a line and we can grab some grinds at Uncle Bo in Kapahulu they have the best pupus on the island.