As Americans look forward to another year, the financial outlook seems more promising than it was twelve months ago.
The stock market, for one, has rebounded strongly while the U.S. economy remains robust. More importantly for consumers, the gap between inflation and wage growth is narrowing.
However, Americans are struggling to tighten their purse strings.
The data says it all.
The vast majority of Americans overspend, and many use credit cards to cover it, according to a recent Nerd Wallet survey. A whopping 84 percent of respondents who have a budget admitted they have exceeded it. What's more, 44 percent of budget breakers say they mostly use credit cards to pay for extra purchases.
Unsurprisingly, American consumers' dependency on the plastic has deepened.
This year, American credit card debt surpassed the one trillion mark for the first time ever, a testament to how pervasive the borrow-to-spend living has become among ordinary people.
Breaking the cycle of overspending, practicing fiscal discipline, and restoring healthy savings sums takes time. However, there are few shortcuts when it comes to building financial security.
By examining what causes overspending, consumers can get a better grasp of what drives their consumption behavior, avoid punishing purchases, and maintain financial discipline so as to achieve their long-term financial goals.
Spend to Impress
Humans are social animals, and the perception of others deeply shapes our behavior. This often leads to the impulse to open our wallets. According to a recent LendingTree survey, nearly 40 percent of all Americans overspend to impress others.
“Some may view spending as a form of social proof, associating material purchases with self-worth or status,” says Khwan Hathai, a certified financial planner and certified financial therapist at Epiphany Financial Therapy.
“Addressing overspending from a purely financial perspective is often insufficient. One must delve into the psychological dimensions of their spending habits to enact lasting change,” says Hathai.
It's not just the – affluent, well-heeled professionals who are just as likely to jack up their spending as their earning power increases.
A recent survey by LendingClub found the number of American consumers who are “just getting by,” increased from 61 percent last year to 64 percent this year. Yet, perhaps surprisingly, 86 percent of those who have recently slipped into survival mode earn a six-figure salary.
Conventional wisdom assumes workers who earn more are able to save more. Yet, that logic doesn't hold if they simply spend more of what they earn.
The process of lifestyle creep can play out after someone gets a raise, an inheritance, or some other financial windfall. They divert it into upgrading their lifestyle rather than investing or saving their extra income. The trend may be hard to reverse, especially if former luxuries are soon treated as necessities, and can undermine their financial future, and, if left unchecked, can erode their investing potential and jeopardize their financial future.
When it comes to spending habits, not all purchases are made equal. Splurging on an extra beer at game time is a small change, but another designer bag or two is another story.
There is a litany of things that even broke people pay top dollar for.
Premium experiences, be it first-row seats, concert tickets, or business-class flight seats, can poke a hole in any budget. A taste in designer clothes, cosmetics, and other top-end consumables can also erode savings.
Different purchases make sense at different stages of life. Yet retirees, in particular, must be on guard against splurging. Without a regular paycheck, financial security is even more vital.
More retirees feel their budgets are getting stretched. In fact, according to this year's Retirement Confidence Survey, virtually half (49 percent) of retirees admitted their total spending is now higher than they expected when they first retired. Last year, only 36 percent of retirees felt the same way.
Boomers beware – there are certain costly items that can damage a retiree's nest egg.
It's natural to want the newly retired to splurge a little to enjoy their golden years. Yet, if they overreach on fancy high-ticket items, from luxury cars to yachts or timeshares, and end up taking out excessive loans in the process.
“While marketed as a luxury purchase, timeshares often come with high maintenance fees and limited flexibility,” warns Douglas Goldstein, CFP at Profile Investment Services. “Boomers should carefully consider the financial implications before investing.”
Steep on State Side
Although the U.S. offers a high quality of life and competitive economic opportunity, it's vital to recognize the steep costs that come with living there. A number of items are extra expensive in the U.S. For instance, college education, healthcare, and cars are three categories that Americans typically pay a premium for compared to similar countries.
There are alternative approaches, though. For instance, studying abroad can save on tuition (possibly avoiding student debt) and expand one's horizons and professional network.
Overspending can mess with everyone's financial plans, no matter how high one's pay package is. Whether it be the influence of social factors or a taste for luxury items, there are many ways to fall into the habit of spending too much and undermining one's financial security for the sake of short-term pleasures. Limiting splurging to only truly valuable items and resisting lifestyle creep are surefire ways to stay on track and undermine one's financial security over the long run.