Why Do We Spend Too Much?

Have you ever walked into a store (or gone to an online shopping site such as Amazon.com) with the intention of picking up one item, or just browsing, and checkout with 3-4 things, none of which were in your budget? Does a similar thing happen to you in restaurants?  Do you end up writing a check for much bigger than intended for a charitable purpose, beyond what your budget can really afford?

I have been curious about these phenomena for some time, and a recent article, together with comments, in the NYTimes on Why Do We Eat Too Much? seemed to have some interesting parallels.  I am particularly interested in the reasons that seemed to be coupled with a mindset and sense of self rather than on any physiological issues.  When I look at the reasons that people overspend, self included, I find some of the reasons intriguing:

–Because we are disorganized–sometimes I find that I’ve purchased the same thing twice (or more) because I have forgotten that I owned it.  I’ve been good about not bouncing checks due to forgetting to note an expense or delaying making a deposit, but this seems to be a problem among many over-spenders.

–Because we are overly optimistic–I have several former co-workers in this category, they would spend on big ticket items in anticipation of a raise or big bonus or promotion, and then the company has a bad year, or the economy is in the doldrums, or they were not promoted as expected.  The first time this happens, I can understand, but repeated purchases based on unrealistic future earnings seems to be more of a cognitive issue.

–Because we are trying to solve some other dissatisfaction in our lives–I see this one practically every day where someone purchases something to try to make themselves feel better.  I am certainly guilty of this with Amazon book purchases, but fortunately have not been bitten by the big-ticket item bug.  I had a former co-worker that purchased a new Mercedes because he rationalized that his unhappiness was commuting in a not so nice car.  Turns out, the new car didn’t resolve his problems with the boss or his wife, and he remained unhappy but with a big car note to pay off.

–Because we want to feel empowered–this is the one that I find most interesting.  I’ve asked some people who are living paycheck to paycheck why they made a big purchase, when they really did know they couldn’t afford it.  Turns out, the spending itself made them feel temporarily powerful.

I highlight these because when we look at many of the recommendations for personal finance for increasing saving, eat out less, pay yourself first, pay down debt, etc… we often forget that sometimes there’s more lurking beneath the surface of our purchase rationale. And simply urging people to forego a latte now and then may not be too useful.

posted at this week’s Festival of Frugality