Psychology of Overspending (2024)

In a world where 60% of people live paycheck to paycheck, overspending has become a widespread challenge that goes beyond budgetary constraints. The root causes of this financial dilemma often stem from human psychology, going beyond traditional financial solutions.

We've all experienced that sense of defeat when we've spent excessively. Overspending is a common problem that affects many people.

Understanding the psychology of overspending can help you recognise and understand its root causes.

Cause 1: Impulsivity

Impulsivity is a psychological factor that leads to overspending.

Impulsivity is making decisions without considering the consequences. Being impulsive can lead to overspending as you may not consider the long-term consequences of your spending choices.

Impulsivity is linked to a lack of self-control, making it challenging to resist spending money.

Cause 2: Instant Gratification

The need for instant gratification is another psychological factor that leads to overspending. We often overspend to immediately enjoy the pleasure of purchasing something new or exciting.

This may be due to impatience and a preference for immediate gratification rather than waiting.

Cause 3 : Stress and Emotional Turmoil

Stress can cause excessive spending. During tough times, shopping can serve as a coping mechanism for dealing with emotions.

Spending money can temporarily distract us from our problems and give us a sense of control.

Using this coping mechanism also known as Retail therapy can be problematic because it can lead to overspending, resulting in more financial stress.

Cause 4: low Self Esteem

Overspending is linked to low self-esteem and self-worth. People with low self-esteem may overspend to improve their self-image and impress others. They might think that purchasing costly items will enhance their image of success or attractiveness.

Cause 5 : Lifestyle Creep

Lifestyle creep happens when expenses increase unintentionally as income rises. This shift can result in a situation where individuals, despite earning more, don't feel like their discretionary income has improved.

How to overcome Overspending

1. Dealing with Social Pressure : To overcome the urge to 'keep up with the Kardashians or Kapoors,' one must intentionally change their mindset. Instead of conforming to societal expectations, people should prioritise defining their own financial goals and values. Having clarity helps in making better decisions and prevents succumbing to the temptation of overspending for the sake of status. Creating a personal financial roadmap helps individuals prioritise their expenses and gain control over their financial journey.
2. Management of Lifestyle Creep: Intentionality is crucial in combating lifestyle creep. As income rises, it is important to carefully review and redistribute funds. To prevent lifestyle inflation from undermining financial stability, individuals should assess essential expenses honestly and allocate any extra income towards predetermined goals. Regularly reviewing and adjusting financial plans helps maintain a balance between earning and spending, preventing unnecessary expenses.
3. Overcoming Impulsive Emotional Spending : Confronting emotional triggers necessitates a thorough comprehension of one's own behaviours. Instead of relying on retail therapy, people can cultivate healthier ways to cope with stress or sadness. To break the cycle of emotional spending, try seeking emotional support, trying alternative stress-relief activities, or taking a pause before making impulsive decisions. Understanding the emotional basis helps develop lasting habits that don't require excessive spending for temporary relief.
4. Managing Inflation: Managing finances proactively is necessary to adapt to inflation's effects. Monitoring budgets regularly using tools or apps helps individuals track their expenses and identify areas for adjustments. This approach helps individuals stay ahead of rising prices and adjust their financial plans accordingly. Individuals can protect their financial well-being from inflation by acknowledging and adapting to changing economic conditions.
5. Managing your credit usage: To address credit misconceptions, it's important for individuals to see credit as a tool, not as additional funds. Choosing cash or debit cards promotes responsible spending by preventing the false sense of extra money that credit cards can create. Avoiding the belief that credit is a safety net or extra income can prevent the accumulation of debt. Using credit intentionally promotes financial responsibility and protects against the temptation to overspend with borrowed money.