What is Overspending?

Understanding Overspending

Overspending often occurs when we buy items we don’t really need, sometimes leading to financial strain. For instance, I once walked into a toy store with my 3-year-old to buy play dough and coloring books but ended up purchasing expensive activity boxes that went unused for months. This impulsive decision, meant to make my child happy and busy, not only cost money but also didn’t achieve its intended purpose right away. Later, I found age-appropriate learning materials online and at local markets that could have been put together more affordably. Additionally, overspending can be assessed in relation to one’s income and wealth; what one person considers overspending might be normal for someone else depending on their financial situation.

In India, spending behavior can typically be categorized into two groups: those who occasionally make overspending errors and those who frequently engage in impulsive spending, leading to recurring debt or severe financial issues. Understanding the psychology behind overspending is crucial for better financial decision-making, improving financial literacy, and addressing debt issues.

Theories of Overspending and Common Practices

Casey Bond discusses five psychological theories that explain poor spending decisions.

Social Facilitation refers to how being around others can influence spending, such as in auctions where the presence of many bidders may lead to irrational decisions.

Delayed Reward Discounting,described by psychologist Carla Marie Manly as the tendency to favor smaller, immediate rewards over larger, delayed ones.

Scarcity Principle, explained by marketing professor Vassilis Dalakas, which is the pressure to purchase items perceived as limited in availability.

Sunk Cost Fallacy, where past investments lead us to continue spending on things like unused gym memberships because we don’t want to waste the initial cost.

Anchoring, where consumers fixate on a price point, such as a discount, without evaluating the actual value of the item.

Cultural norms also impact spending behavior in India. For instance, the tradition of gifting during various occasions and festivals often strains resources, particularly in marriage-related expenditures. Instead of extravagant celebrations, helping newlyweds build assets could be more beneficial. Similarly, investing in children’s education is a common practice that can destabilize finances, especially during economic downturns. To avoid this, starting early with investments like equity-oriented mutual funds or the Sukanya Samriddhi Yojana for low-risk options can be prudent.

Another common trigger for overspending is the desire to keep up with others who have acquired significant assets. However, as Deborah Fowles notes, a person’s value is not determined by their wealth. Uma Shashikant, Chairman of the Centre for Investment Education and Learning, emphasizes that true power comes from understanding and managing our financial choices wisely, rather than seeking validation through spending.

Practical Tips

To enhance financial decision-making and avoid overspending, consider these practical steps:

• Set priorities for your spending in your budget.
• Keep a spending log to track your expenses.
• Educate yourself about money and investment through reading and learning.
• Regularly ask yourself if a purchase will genuinely improve your life.
• Avoid using e-commerce apps on your mobile device if you’re prone to impulsive buying; use a computer for such transactions instead.
• Use a combination of credit and debit cards for transactions to manage spending better.

By understanding the psychology of overspending and reflecting on your financial decisions with clarity and purpose, you can avoid debt situations that affect both your professional and personal life.