If you had to guess the reason most people file for personal bankruptcy, you may think — like I did — that adverse life events, such as health problems and unemployment, are the biggest culprits. However, according to research by Ning Zhu, an associate professor of management at UC Davis, reckless spending, not illness or job loss, causes most bankruptcies.
In his research, Zhu concluded more than 50% of bankruptcies were caused by debt, while unemployment and medical problems accounted for 13% and 5% respectively. This is actually good news. It means you can drastically reduce your risk of getting into financial problems by simply learning how to avoid overspending and living within your means. But that is easier said than done. Dieting is another big problem with an easy solution: eat fewer calories than you burn. But 8 out of 10 dieters still fail to lose weight, and the United States is the second most obese country in the world despite having a $60 billion weight-loss industry.
Overspending is a complex issue that, as with overeating, involves a wide variety of emotional and psychological factors we are often not even aware of. Here are 12 tips to get you on the right track to curb overspending.
1. Track Your Spending Down to the Cent
This is a no-brainer but it has to be said. Before you can stop overspending, you need to know what you’re spending your money on. Take a month to jot down everything you buy. If keeping an expense diary does not come naturally to you, consider using a money management app, such as Mint, Moneyspire and Spendee. Some expense trackers and budgeting tools, such as BillGuard.com and Checks.com can automatically synchronize with your credit cards and bank account, which makes keeping tabs on your spending a breeze.
2. Set Financial Priorities
Decide what your financial priorities are. These can include saving for retirement, buying a house, going on a vacation, and paying off debt. If you have specific objectives, you can use them as a benchmark to measure your progress. Also, if you’re working toward a goal that’s important to you, you will be more likely to resist the impulse next time you are tempted to buy something you don’t need.
3. Create a 50/30/20 Budget
The danger when writing out a budget is to get carried away by good intentions and create a budget that is so strict and Spartan you’re incapable of sticking to it, once your minimalistic piety wears off. A budget must be realistic to work.
In their book, “All Your Worth, The Ultimate Lifetime Money Plan,” Elizabeth Warren and Amelia Warren Tyagi propose the 50/30/20 rule of thumb when designing a budget. The rule represents the percentages of your take-home income you should dedicate toward needs, wants and savings in a balanced budget.
4. Make Saving Automatic
If having the extra money in your wallet or bank account is burning a proverbial hole in your pocket, put any extra cash into a savings account. You can’t overspend what you don’t have readily available. Instead of just promising yourself you will set aside money for your financial goals, open a savings account for each one. Then set automatic transfers from your checking account to your savings accounts. If you don’t have a regular bank account, some prepaid credit cards, such as American Express®’s Bluebird and BB&T MoneyAccount, allow you to create sub-accounts for savings.
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5. Wait 30 Days Before Major Purchases
Impulse buying is the main reason we overspend. According to the whitepaper “What Causes Customers to Buy On Impulse?” impulse purchases represent 40% of all money spent online. Fight back by following the 30-day rule. You probably have already heard about this simple but effective budgeting trick. This is how it works. (UIE)
If you feel the urge of splurging on a non-essential item, put it back. Leave the store. Go home. Take a cold shower. Close the website. Do whatever you need to do to avoid buying it. Then write down the date, price, and store or website where you found it. During the next 30 days, consider whether you really need it and can truly afford it. Check its features, read reviews, and shop around for better deals. If after a month buying it still seems like a good idea, go ahead, treat yourself; but make sure you don’t use credit to pay for it.
6. Shop Like a Broke Person
This is a shorter variation of the 30-Day Rule. If you’re planning to buy a big-ticket item, go to the mall, but leave your wallet behind. Just make sure you take your driving license with you.
According to David Krueger, author of “The Secret Language of Money: How to Make Smarter Financial Decisions and Live a Richer Life,” when we anticipate an immediate reward, such as buying something we like, there’s a spike of dopamine in the brain, which clouds our judgment. Simply not having cash or credit cards available will stop you from impulse buying, which will give you the time to sober up and determine whether it is an impulse buy or something you will really use and enjoy. If you want to buy something but can be bothered to go back home to get your wallet, you probably didn’t need it that much in the first place.
7. Beware of Shiny Sales Displays
Comparing prices and looking out for deals is a great way to reduce spending. On the other hand, sales can also push you to spend more than you need. According to a study by Ernst & Young, 88% of impulse purchases are for items that are on sale.
Stores use all type of tactics to convey the illusion you’re actually saving money when you buy a product you didn’t know you needed five minutes earlier. A classic example is when multiple items are sold at a discounted rate, such as two bottles of wine for $30, when each one costs $20 if bought separately. It might be a good deal, but you still spent $10 more than you needed to.
8. Go On A Credit Card Fast
If you regularly overspend, go on a credit card fast. Although credit cards can save you money when used wisely, they can also push you to buy impulsively. Researchers from the San Francisco State University interviewed 1,600 participants, suggest that credit cards may be facilitating compulsive buying because they separate the pleasure of buying stuff with the pain of paying for it.
If you pay with cash, the researchers suggest, the pain of paying for stuff will offset the high you get from buying. Less transparent payment forms, such as credit cards, tend to be treated as play money and therefore more easily spent.
9. Hands off the Merchandise
According to a study performed by UCLA researchers, Joann Peck and Suzanne B. Shu, just touching an object increases your “perceived ownership” of it, which will increase your chances of buying it. This is the reason car salespeople invite you to “take a seat, switch the radio on, oh, and why don’t you take it for a spin.” It is also, why cellphone salespeople are more than happy to open brand new phones out of the shrink-wrap and let you handle them.
Window-shopping is fun, but it’s also expensive. Unless you have superhuman self-control, don’t touch, try, or play with things you cannot afford. The impulse to buy something you already have in your hands may be too much to handle.
10. Make More Friends
Feeling lonely may cause you to become materialistic and buy things as a kind of retail therapy, according to a study published in the Journal of Consumer Research. Rik Pieters of Tilburg University analyzed over 2,500 consumers over a 6-year period and found that people who were lonely were more likely to pursue a materialistic lifestyle.
11. Just Get Married
Alright, don’t do that. But according to the same Tilburg University study, the loneliness/materialism effect was particularly strong among singles. The study showed that single consumers were generally lonelier than their married counterparts and more likely to succumb to retail therapy to cheer themselves up. A different study showed that households with higher incomes made up of unmarried adults make 45% more unplanned purchases than their married counterparts.
12. Wear High Heels While Shopping
Do you tend to overspend when you go shopping? Next time, shop in heels. I know this sounds stupid, but according to new research by Brigham Young University, shoppers who wear high heels think differently when they shop. The study indicated that consumers who experience a heightened sense of balance were more likely to weigh their options and go with a sensible mid-price product. If not for the balance, teetering around in painful heels might keep you from sticking around a store for too long.
If wearing heels is not culturally acceptable in your case or you’re shopping online, the BYU researchers also found the same effects while performing other activities that required balance, such as leaning back on your chair, standing on one foot, or playing a Wii Fit game.
When it Comes to Spending, Think First
A study by researchers from the University of Pittsburgh indicated that consumers who think about the pros and cons of a choice before making a decision were more likely to exercise and consume healthy foods. They also had lower rates of alcohol dependency, procrastination, and overspending. There was also a correlation with their likelihood to be saving for retirement.
Although there is no silver bullet against overspending, these tips are a great place to start. Just taking time to consider your spending patterns and weighing the pros and cons of a purchase is a huge step toward building up your self-control and protecting your financial health.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.