Why We Overspend

why we overspend, financial tips los angeles, credit union los angelesUnderstanding why we do things helps us learn how to change those behaviors. This is especially true when it comes to money.  If we can understand why we overspend, we can learn how to limit the behavior that causes overspending, thus helping keep you out of debt and on track to meet your financial goals.

 

Fact: We spend more money when we use credit cards instead of cash

A study performed by MIT in 2000 showed that people are willing to spend more money (up to 100% more) when using a credit card to make a purchase instead of cash.  When we use a credit card, it’s easier to spend money because we don’t see the money leaving our pockets.  A swipe of the card is all it takes, whether it’s a $2 purchase or a $200 purchase.

Solution: Use a cash-based budget

A cash-based budget can be powerful at keeping your spending to a minimum.  It helps you understand how much money you are spending and gives you a physical limit to the amount of money you can spend.  If you budget a certain amount of money each month for eating out, and you use that all by the 20th of the month, there is a physical reminder (no more cash) that you shouldn’t go out to eat the rest of the month.

 

Fact: We are Impulsive

A 2009 study shows that 60%-70% of all purchases made in supermarkets are unplanned.  We buy things we often don’t need and don’t plan for.  Because of this, it is easy to overspend.

Solution: Plan your purchases

If you are serious about making changes to your spending habits, make it a rule that you never buy anything unless you have planned for it.  Set a number of days you need to wait before you purchase something.  For example, if it is under $50, make yourself wait 3 days before you purchase it.  If it’s over $50, wait a week or longer.  Set rules so you don’t purchase items on impulse and make sure you have enough money for that purchase.

 

Fact: We forget about small purchases

Financial Author David Bach explains this well with “The Latte Factor.”  The little things that we spend money on every day, like a latte, add up to a lot of money.  If you purchase a $4 latte every day, by the end of the month, you will have spent $120.  That’s nearly $1500 in a year.

Solution: Track your small purchases

Keep track of what you are spending on a daily basis and cut back where you can.  Although a latte every day is nice, a cup of coffee or tea will do the trick.  Also, pack a lunch for yourself instead of eating out.  Little changes like these can create a tremendous amount of savings over time.

 

At Camino Federal Credit Union, we are always here to help.  If you are interested in a free financial review, give us a call at 800-835-3400, or stop by one of our branches. We look forward to helping you on your financial journey.

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