How to Identify and Stop Overspending

Sarah Tecla, Preferred Banking Office Assistant Manager, First Republic Bank
July 14, 2022

  • Overspending may stem from impulse or haphazard purchases that can result in adverse consequences, including credit card debt and a lower credit score. 
  • Curbing overspending requires taking an honest look at how you spend your money, as well as setting financial goals to help you use your money purposefully. 
  • A financial expert can help you explore the underlying causes of overspending, as well as help you develop a plan to address it.  

Modern technology has made it easier to make purchases anytime and anywhere, whether you're using a debit card to shop in person or a credit card to make purchases online. Simultaneously, the cost of living is increasing with inflation increasing to 8.6 percent between May 2021 and May 2022.  

An increased opportunity to spend, paired with higher prices, means consumers may face an increased risk of overspending. Without using budgeting to control and rein in spending, people may be faced with serious financial consequences, including credit card debt and lower credit scores. 

Below, we'll discuss identifying and overcoming overspending while sharing actionable tips to help you learn how to spend better.

How to identify overspending

Learning how to avoid overspending begins with taking an honest look at your spending habits. While your budget may allow for the occasional planned splurge, repeated impulse purchases may lead to overspending which can affect how much you have on hand for necessary expenses.

One can identify overspending by looking for these signs: 

  • Difficulty prioritizing expenses: Consider how you’re spending your money. In general, the biggest portion of your spending should be used to cover your basic living expenses, including saving for your short- and long-term financial goals, such as building your emergency fund or preparing for retirement. If last-minute decisions and impulse buys make up a greater portion of your spending than your essential expenses, this may indicate you're overspending.
  • High credit utilization: Overspending can lead to using more money than you're receiving each month, often resulting in increased use of credit cards and more opportunity to go into debt. Having a high credit utilization ratio — which means using a large portion of your available credit — may indicate that you're overspending.
  • Mindless or impulsive spending: Often, people overspending are simply not aware of how much money they are spending each month. Try making a list of items that you spend money on every month. Review that list against your spending. If you identify several purchases or subscriptions you forgot about, you could be unknowingly overspending.

Consequences of overspending 

Left unchecked, overspending — like many bad financial habits — can have severe consequences. Spending too freely may result in a credit card balance you can’t pay in full at the end of the month, leading to ongoing debt that may be difficult to pay off due to the high interest rates on most credit cards. A high account balance also has the potential to lower your credit score, which may make it more difficult to secure additional credit. 

Overspending can also have personal and social consequences. Carrying debt can contribute to stress and anxiety, affecting your relationships and mental health. A low credit score may make it more difficult to work towards milestones, such as planning your dream wedding, buying a home with your loved one or saving for a child’s education.

How to rein in overspending

Improving your financial well-being is definitely within your control and taking steps to reduce overspending can help you reach your financial goals. 

Make a budget for shopping trips and carry a shopping list

Taking a more regimented approach to shopping can help curb impulse purchases. Shopping from a grocery list can help ensure you buy only what you need and keep you on track to save money. For example, planning ahead and buying ingredients for that week's meals can set you up for success and help remove the temptation for pricey takeout. 

Keep cash on hand

Those who find themselves making impulse purchases — or have difficulty tracking their spending — may be better served paying with cash instead of a credit card. Keeping cash on hand can naturally limit your spending ability by ensuring you don't spend more than the cash you've taken out for the week.

Spend only what you can afford

Take an honest look at your income and how much you can feasibly afford to spend each month. In general, avoid going into debt on consumer purchases, such as home goods and clothing that aren't essential. When you do take on debt, for example, to purchase a home, pursue training or fund an education, calculate your debt-to-income ratio to help determine how much you can reasonably afford. 

Organize expenses into categories and track them

Spending mindfully requires understanding your monthly expenses and learning how much of your spending goes to “needs” and how much to “wants.” 

To begin organizing, look at your bank statements and think critically on each transaction to decide which expenses go into each category and if they are "needs" or "wants". You can also import your transactions into a budgeting software that will help sort your expenses into categories — for example, housing, entertainment, groceries, clothing and more. This will allow you to see where your money is going and help you identify areas where you can cut down on your spending. 

Track weekly savings

In addition to tracking your expenses, also note how much money you’re saving on a weekly or monthly basis. Regular saving is important as it helps you build financial security that can protect you from debt — and financial stress — later on. It's also a great guidepost that can encourage you as you start looking critically at any overspending. Note how much you’re saving currently and watch that number improve as you start reducing your overspending. 

Automate savings

Setting up automatic transfers from your checking account to your savings account makes saving feel easier since you won’t need to manually transfer over funds each paycheck. This can also help combat overspending by automatically removing the funds from your checking account. Automated savings makes any overspending a more conscious decision since you would have to withdraw the funds from another account.

Set specific, personal savings goals

While any amount of saving helps build financial security, it’s helpful to create specific financial goals for yourself. These might include saving for a down payment on a first home, building up your emergency fund or saving for training or education. These larger aspirations lend a greater purpose to your weekly and monthly savings goals and provide motivation to continue saving your money, rather than spending it. 

Develop or refine your retirement savings plan

No matter what your ideal financial future looks like, it includes feeling financially secure for life. Creating a retirement savings plan — a road map that connects your spending today with your financial future tomorrow — can provide a sense of purpose for how you use your money, which may help you avoid impulse purchases that can lead to overspending. 

Psychology of spending money

There might be societal pressure that pushed you to overspend, but ultimately, you are in control of your spending habits. Social media continually advertises new opportunities to spend money and the peer pressure or fear of missing out (FOMO) can lead you to feel that overspending will help you keep up with peers. Having goals and a plan for can help keep you from overspending to keep up with others. 

In addition to this, many consumers also fall prey to lifestyle creep, or increasing their spending as their income levels increase. While earning more may provide the money to work on goal projects, lifestyle creep can also become a slippery slope that makes it difficult to save, even if you’re earning significantly more than you did before. This is why setting a series of savings goals — including long-term savings for retirement — can be especially helpful in curbing overspending as your income grows. 

How to save money and not spend it

Ultimately, using your money mindfully is the key to avoiding overspending. No matter what your financial goals are or what your personal budget looks like, becoming conscious of where your money is going — and assessing how well that aligns with your longer-term goals — can help you reduce the mindless spending or impulse purchases that often result in overspending.

If you’re struggling to set realistic goals, you’re not sure how to start budgeting or you simply want support and expertise in reaching your goals, consider consulting a financial advisor. An expert can review your budget to help identify overspending, as well as offer realistic plans to help you save money more efficiently, from building a robust emergency fund to saving for the retirement of your dreams.

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