Top 10 Reasons People Spend More Than They Earn
Rule #1 of financial freedom is spending less than you earn. If you can’t do that, you’ll never be financially successful no matter how hard you work, how many hours you put in, how many promotions you receive, or how much money you make.
It’s a simple rule, and most would consider it common sense. But, the U.S. has a negative savings rate, meaning this common sense rule may not be so common place. I recently saw a statistic that claimed that about 43% of American families spend more than they earn each year.
It’s helpful to understand why people over spend, and be aware of any that might apply to you.
10.Keeping up with the Jones’ - Psychology plays a big role in our spending habits. We want to feel as successful or more successful than those around us. We spend a lot of money to keep up that image. The reality is, the neighbors probably can’t afford that new boat either.
9. Avoiding the truth - It’s easy to overspend when you don’t keep tabs on how much you have. People will go for years unaware of their true financial situation because they’re afraid to look at what kind of mess they are in. It’s easier (temporarily) to just avoid it. They’ll pay their minimums and add new credit cards as necessary ignoring the growing debt total.
8. Counting the chickens before they hatch - In National Lampoon’s Christmas Vacation, Clark Griswold made a large down-payment on his swimming pool expecting that his upcoming Christmas bonus would cover it. Instead, he was enrolled in a Jelly of the Month club. We are often similarly optimistic about incoming money. It’s spent before it’s received, and it’s often not as much as was expected nor received when expected.
7. Plastic doesn’t feel like real money - It’s common to spend more when using credit cards than cash. The experience of hading over a card that you get back is just not the same as handing over some cold hard cash and seeing it disappear.
6. Immediate gratification - It’s all around us. We’re bombarded with the immediate gratification mentality. “Instant pain relief”, “fast food”, “on demand video”, and the big financial one, “buy now, pay later”. We’re too used to getting what we want now even if we don’t know how we’ll pay later.
5. Lifestyle maintenance - Most people increase their expenses as quickly as they increase their income. The same cannot be said for decreases in income. Once we become accustomed to a certain lifestyle, it’s pretty difficult to cut back, even if our financial situation changes for the worse.
4. Poor as a child - Whether they’re trying to make up for their deprivation as a child, a fear of money being taken away that isn’t spent immediately, or a lack of financial understanding, being poor as a child is an often used excuse of overspending adults.
3. Sense of power - Spending money actually makes some people feel powerful. The more they spend, the more powerful they feel, and the only way to get that rush is to spend more money.
2. Prove self worth - Buying that fancy new car proves you are somebody, right? For some people spending makes them feel like they are worth something to the world.
1. Can’t say no - Some people feel like a failure when they can’t meet the wants of others. Whether it’s new toys for the kids, new outfit for the spouse, or a night out with the friends, some people just can’t say no, even when they can’t afford to say yes.
It is interesting that the last couple are really just excuses - as you say, it is important for people to recognize these excuses and deal with them not as hindrances but as motivations to move forward.
Very good post!
[…] Money explains the Top Ten Reasons People Spend More Than They Earn - another view on why people don’t internalize what they understand as good […]
So true!!!
I live with POOR AS A CHILD, and she finds every excuse to justify her spending, or denies spending anything at all…
That combined with the CAN’T SAY NO, and you see what financial mess we are in.
[…] Top 10 reasons people spend more than they earn @ Accumulating Money - by the way, none of them are good reasons […]
I quite agree with you that Rule #1 of financial freedom is spending less than you earn. So if we want to spend more, for example, buy a better house for our family, then you have to increase your income since you must spend less than you earn. This is the theory that I always think.
I am in a profession that makes a fair bit of money, and in the process of dating someone in the same profession (115k/yr each). What I have noticed that people who “expect” to make a lot of money often choose to spend it cause “they can.” I see this everywhere in my profession (sports cars, expensive tastes).
Another couple in our same boat think that, on 230k/yr, they can afford a 750k house. My s/o and myself took the same salary and figured we could afford a 450k house.
The difference? The mindset of the two couples and nothing else.
The real reason is that people have low self esteem and spend to make themselves feel good, or to solve a feeling that something is lacking in their life.
Well, sometimes buying that more expensive car or outfit CAN help you get new contracts, a promotion, better wage, …
Nowadays people dont practice saving… very sad
Another reason is menal health issues - spending sprees are a classic symptom of the manic phase of manic depression. This is an aspect of bipolar that is incredidibly common but rarely talked about. Doesn’t help when POTUS tells people there duty as citizens is to “go shoping”.
All the above reasons are 100% true.
One thing you missed: People can spend more than they earn because they genuinely don’t know what they earn, or what they spend. A lot of people don’t even think about doing a budget until it’s already too late.
Very interesting post. Perception is the key to riches or failure its your own direction.
But you don’t have to Spend like your rich just to make other people perceive that you are and if the only reason why you are trying to get rich is to prove something to someone else, you are already headed down the wrong path anyways.