Clever Real Estate, a real estate education resource, conducted a survey of 1,099 American adults about their spending habits in 2024…with some startling results1:
- 74% of those surveyed admitted to an overspending problem. The overspending problem was reported to be more acute with Millennials (86%) and Gen Z-ers (71%) than Boomers (56%).
- 84% justify unnecessary purchases by telling themselves they deserve a treat.
- 16% reported that spending ruined their lives.
THE FIRST STEP – RECOGNIZING THE “WHAT”
The term overspending was not specifically defined in the survey report. I believe its definition is important if overspending as a problem is to be solved. The definition one assigns to overspending essentially outlines the goalposts or spending boundaries – which if exceeded, is the problem.
We know that the first step in solving any problem is recognizing one exists. That cannot happen without a definition of what is meant by overspending. Reference to an overspending problem, is not merely reference to a budget overrun. Rather it suggests the pernicious activity of living beyond one’s means on a regular basis. Even the concept of living beyond one’s means, however, can be subject to different interpretations and rationalizations.
Different people may have different views of how much they can spend. Some may feel they can spend funds they haven’t received yet. Sometimes these funds may be highly likely to be received (such as a tax refund) while in other cases they are far more speculative as to amount, timing or even whether they will actually occur (such as anticipating an inheritance, gift or repayment of a family loan). Others may feel they are able to spend only a fraction of the funds they have already received, fearing an unanticipated cessation or reduction of an income stream.
To add some more complexity to the issue, once a definition of overspending is arrived at in a particular case, it may change over time with changes in the criteria used to create the definition. Regardless of the criteria used, the best definition of overspending is born out of financial planning theory and analysis rather than assumptions, feelings and emotions.
THE SECOND STEP – RECOGNIZING THE “WHY”
Recognition of the existence of an overspending condition can be objectively based on some symptoms that were reported in the Clever Real Estate survey, for example1:
- 16% of the respondents reported spending ruined their lives.
- 46% of the respondents missed paying a bill due to non-essential spending.
- 45% of the respondents cried over the spending habits.
- 40% of the respondents would not save any of a $10,000 windfall.
Of course, the above may not be the only symptoms of overspending. Not all symptoms of overspending are transactional events. Sometimes it’s just a long-term condition of depleted savings and increasing debt, that without correction may cause a financial crisis.
Overspending has been attributed to causes such as an undisciplined spending history (“the way I was raised”), stress, shopping addiction, various insecurities and peer pressure. One person I met opined that his overspending was due to the increasing cost of “necessary” items and a temporary “underearning” condition. The possible significance of these kinds of rationales is that they recognize the existence of an overspending condition but seem to create distance between themselves and the cause.
An interesting line of thought that corroborates some of the situations the Family Wealth Decisions Group has observed, postulates that High Income Earners Not Rich Yet (HENRYs) may be deluding themselves about their lower than desired wealth level by maintaining an unaffordable lifestyle. These high-income levels fuel a high lifestyle and a modified definition of what is a necessary expense as opposed to a discretionary expense. This elevated level of consumption may lead to an illusion of affluence – a disconnect between high income and low net worth5. Continuing the high lifestyle may continue the illusion, acting as a self-fulfilling prophecy.
If the first step in solving a problem is recognizing that one exists, owning our role in creating and perpetuating the problem certainly is Step 1-A. Once that occurs, appropriate tools can be brought to bear. Some of these tools may include: therapy to help identify undesirable habits or address emotional issues, strict use of budgets and lists, limiting access to money and credit and creating prioritization in the products and services purchased.
THIRD STEP – RECOGNIZING THE SIZE
Once work has begun in identifying the behavioral and emotional underpinnings of overspending, the next question that needs to be answered is how big the problem is. This is actually the easy part. It’s just math:
- Spending more than you earn can deplete savings, increase debt and ultimately increase stress and unhappiness and generally is unsustainable long-term.
- Failing to account for the impact of inflation, income taxes, emergency reserve funding and funding for unanticipated needs in a spending plan can become its downfall.
Therefore there a few math questions that require answers. Measurements made over the most recent 12 consecutive months is a great starting point. Some of the math questions may include:
- owHow much income is received monthly, after tax, that is available for spending?
- How much do you spend every month, other than for income tax?
- How much of your monthly spending is for required expenses?
- How much of your monthly spending is for discretionary expenses?
- How do you define required and discretionary expenses?
- Do required expenses include funding for savings, protection and emergency reserves?
Clearly, income and spending data are necessary ingredients in measuring the size of the problem as well as in helping to design workable and realistic solutions.
FOURTH STEP: ADDRESSING SOLUTIONS
To begin a solutions process, perhaps some lessons from Dr. Seuss can help:
- “Sometimes the questions are complicated, but the answers are simple”2. Often, we may try to obfuscate the reasons for bad decisions with convoluted explanations, but the resolution may be as simple as identifying and fixing the cause.
- “I would not, could not, in a box. I could not, would not, with a fox”. The persistent efforts of Sam-I-Am to serve green eggs and ham overcomes preconceived notions and the hesitancy created by new situations by giving his efforts a chance3.
- “It's not about what it is, it's about what it can become4.” This stresses the importance of having a goal, working towards it and the value of achieving it.
An overspending problem cannot be fixed by math alone. The bad math that caused the problem was installed and maintained as a result of other factors, often despite others advising changes. This is where some basic tools can be employed to change some of the offending behaviors. These tools may include, among others:
- Don’t use plastic (credit or debit cards) – use cash. If you cannot access cash, you cannot make the purchase. Obviously, using cash can avoid incurring debt and high interest on purchases. The acts of securing cash and paying with cash can also reinforce your detailed understanding of where your money is going and how much things cost in real time – not just at the end of the month when you can elect not to look at it. The Clever Real Estate survey found that 78% of the respondents made purchases they immediately regretted and 28% were afraid to check their finances1.
Debit cards are useful tools and may be considered the same as cash when making purchases, except it is not the same as cash. Where good cash management skills have not been developed and reinforced, the debit card account balance may not be actively tracked and may be overdrawn, exacerbating the problem.
We also believe credit cards can be valuable tools, but only for those who do not have cash management or overspending issues.
- Engage in “intentional spending” by being more thoughtful and mindful about your spending choices. Aids in intentional spending include making and using budgets, prioritizing expenses and using and adhering to shopping lists6.
- Engage a financial advisor who can assist you with developing your cash management skills including designing an expense prioritization plan and budget that can work for you. In addition, a good financial advisor can provide accountability to keep you on track.
- Consider consulting a financial therapist where there is difficulty in consistently engaging in good corrective activities such as those listed above to explore the feelings and beliefs behind your financial habits7.
CONCLUSION
Overspending is usually the result of a complex combination of emotions, behaviors, financial naivety, habits and events. Correcting such an issue absolutely requires some financial planning acumen. However, without emotional “buy-in,” financial solutions alone may not succeed in changing the underlying stress, insecurities or other issues causing damaging spending activities.
When I shop for clothes, I am often told that I am too short for my weight. Clothes don’t fit me right off the rack. They need alteration. Just as there are “standard clothes sizes” there are standard financial “rules of thumb” for creating budgets and for the percentage of income to be spent in different categories. I suspect that most of us may not fit right off the financial rack.
The Family Wealth Decisions Group can be likened to a financial tailor, supplying the expertise to help you make the necessary lifestyle and budget alterations to address overspending or other financial issues. Please contact us for a complimentary 45 minute “fitting” to discuss your financial questions.
- https://listwithclever.com/research/bad-spending-habits-2024/
- https://www.goodreads.com/quotes/6805-sometimes-the-questions-are-complicated-and-the-answers-are-simple
- https://www.bookey.app/quote-book/dr.-seuss's-green-eggs-and-ham
- https://www.goodreads.com/quotes/513674-it-s-not-about-what-it-is-it-s-about-what-it
- https://www.fa-mag.com/news/understanding-the-disconnect-between-high-income-and-low-net-worth-77958.html
- https://finance.yahoo.com/news/7-ways-intentional-spending-help-180009176.html
- https://www.nerdwallet.com/article/investing/how-financial-therapist-shift-your-money-mindset
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