Psychology models suggest that all people are wired to seek pleasure. When it comes to finances, people experience pain and pleasure in two ways, either as spenders or as savers. As a spender, you find pleasure in buying things and experience more “pain” in having to wait or delaying gratification. Savers, on the other hand, find pleasure in having more money in the bank and experience “pain” whenever they have to spend money.
According to a study by the National Foundation for Credit Counseling (NFCC), about 20 percent of consumers could not make ends meet each month without credit. As for the other 80 percent of credit cards users, we can probably assume that many of them use credit for “wants” each month. Going back to the psychology of spending, we know that spending money on wants can lead to happiness. This is because of instant gratification. Instant gratification is the desire to experience pleasure or get what you want without delay or having to wait. Sure, you get what you want, when you want it, but this can come with delayed consequences.
|US Consumer Debt Profile|
|Average credit card debt||$16,140|
|Average mortgage debt||$155,361|
|Average student loan debt||$31,946|
In some instances, spending money leads to happiness, but only to a certain amount. Buying things can be used as therapy but overspending leads to stress. Many Americans have a spending problem. The average credit card debt per indebted household in the United States, as of October 2015, was $16,140. In total, American consumers owe $890.9 billion in credit card debt.
Causes of Overspending
What is it that causes us to charge items to a credit card that we do not need and that we know we cannot afford?
- Shopping can be addicting.
Our brains are wired to create habits and to seek experiences that are pleasurable. According to a study from Stanford University, compulsive shoppers typically end up with huge debts and their houses stuffed with unused merchandise. Shopping binges are often precipitated by feelings of depression and anxiety; they can generate temporary drug-like highs but leave the shopper crashing into guilt, anxiety, and fatigue. While everyone may not be this extreme, there is some psychology behind why you shop and what you should do to get spending under control.
- Wanting to keep up with the Joneses
In today’s world, the Joneses aren’t just your next door neighbors with the new car or the massive flatscreen you can see from your window. Because of social media, we can see what everyone has, all of our friends, family and other acquaintances. We see someone’s new car and immediately feel a pang in our hearts, wishing we could afford a new car. Psychologically, we begin to feel like we deserve something newer, or like we must not be as good as them if we can’t have it too. Trying to keep up with other people’s purchases will lead to stress and financial instability.
- Falling prey to advertising leads to impulse buying
You walk into a store without a list and, undoubtedly, you will fall for all the advertising and end up impulse buying things you don’t really need. The sales will attract your eye and you may find yourself thinking that you’ve found a good deal or a “must-have” item, when in reality you have one just like it at home that you bought at the last sale.
- Low self-esteem
People who feel bad about themselves tend to use retail therapy to get the immediate boost in mood (instant gratification) that comes with having new things. The problem is, it only lasts a short amount of time and then you go back to looking for things to make you feel better about yourself or trying to get people to notice you.
- Lies consumers Believe
People are tricked into believing so many lies. Do any of these sound familiar? If I have more things, I will be happier. Nicer things will make others like me more. The store is offering 12-month, interest-free financing, so there’s no harm in buying now. I can pay later. I’ll never be able to save up enough to buy it with cash.
- Set up a budget that is within your means and adequately addresses debt and savings. Be sure to allocate funds for spending on things you want so that you do not feel deprived or regret making smart decisions.
- Cut fat from your expenses. (If you have cable maybe you can downgrade your package or cut down to just internet and get Netflix.) There are many ways to cut expenses without hurting your quality of life.
- Give time instead of money to causes you care about until you are out of debt. Giving of yourself contributes to increased self-worth, and has a positive effect on your psyche. Giving to others also releases the same endorphins as instant gratification.
- Talk to your family and friends about your goals so they can hold you accountable. Most will be incredibly supportive and help you make smart decisions.
- Use cash instead of plastic. Many studies have shown that people are more psychologically attached to cash than their credit cards. In fact, a Dun & Bradstreet study found that people spend 12 to 18 percent more when using credit cards than when using cash. This likely more than offsets any rewards or incentives your cards offer. McDonald’s also found that the average transaction rose from $4.50 to $7 when customers used plastic instead of cash.
- Stop and think before each and every purchase about whether you truly need the item. This will help with impulse spending.
The truth is that having more things will not make you happier, having expensive things will not give you more friends, and you can almost always wait and save up for the thing you want. Studies show that buying experiences provides greater happiness than buying material things and that delaying gratification makes you appreciate your purchase longer. Our culture is one of disposable consumerism — items aren’t made to last, and even if they are, the technology will need updating before you know it. The latest iphone will be old news in six months. It’s important to remember that material possessions are “dated,” but experiences last forever.
Once you truly believe that money or a lack of it does not determine your worth, you free yourself from the psychological barriers that keep you from handling your money wisely. Then, you’re ready to implement daily strategies that will help you build and maintain a stable financial future.
Steps to take
We Can Help!
If you want to get your spending under control, we can help. One great resource is our monthly budget calculator, which allows you to set up a financial plan for all of your income and expenses and can help you identify places to cut back. Of course, our expert counselors are also available to help, and they will review your budget, credit report and credit score with you free of charge.