The Causes of Overspending
It's relatively easy to build wealth and become financially independent. You simply have to spend less than you earn. Although most people can understand this concept, actually doing it is a very difficult proposition for the majority of American consumers.
According to the Federal Reserve, Americans now owe roughly $870 billion in revolving debt. A large amount of this massive debt is on credit cards which charge an average of 14.5% in annual interest (many credit card companies charge well over this rate). To reach your goal of financial security and independence, it is important to understand the causes of overspending. Once you become aware of what factors influence your spending habits, you will be in a position to better control your spending and save money.
The following examples are some of the most common causes of overspending. Being able to recognize (and avoid) these situations can help you make smarter decisions when it comes to managing your finances.
Easy Availability of Credit
This is probably the biggest reason people overspend. Most households have at least two major credit cards and many have considerably more. As of June 2012, the average debt on these credit cards was approximately $15,500. It doesn't take a financial expert to figure out that if you only pay the minimum amount due each month, it will take you years (or decades) to fully pay off your outstanding debt. Add to this the interest charges you will also pay and it's easy to see why Americans are literally drowning in credit card debt.
Studies have shown that consumers who use cash for purchases give more thought and consideration to what they are buying. Many times credit card users think about the small monthly payment and don't take into consideration the actual purchase price of an item. The problems begin when you start charging things that you don't have the cash to pay for.
Easy Access to Cash
Getting cash used to be a long and drawn out process. You would write a check and cash it at your local bank. Today, debit cards are used for even the smallest purchases. Most people have access to their bank accounts 24/7. This can be dangerous for someone with poor money-management skills.
It's very easy for all those “small” purchases to add up. When you swipe your debit card, the money is electronically taken from your account at that very moment. If you consistently use your debit card throughout the week for groceries, gas, morning coffees, lunches, and other purchases, you may not realize how much you have actually spent until you balance your checking account.
Misuse of Credit Cards
Credit cards can be a great financial tool when used properly. If you make purchases on a credit card and pay off the entire balance each month, you are using your cards in the correct manner. Problems arise when you carry over balances each month and continue to charge new purchases. High interest rates can really hurt you and make it much more difficult to fully pay off your debt.
Depending on your credit limit and outstanding balance, the minimum monthly payment required sometimes doesn't even cover the finance charges. In this scenario, you could end up paying for old purchases over the next twenty years! Credit card debt is one of the biggest roadblocks to financial independence and the ability to accumulate wealth.
Spending as Therapy
Everyone likes to shop. There's no denying it- buying something new feels good. You shouldn't feel bad about it as long as you are reasonable and don't go overboard. The important thing is to stay in control. Impulse buying and careless spending can destroy a budget. Learn to differentiate between a “want” and a “need”.
Consider saving a little from each paycheck and put it aside as “fun money”. When and if you decide to buy something, use this money instead of a credit card. You won't have to worry about paying for the item over the next two years and you'll save interest charges, too.