Overspending will always have a negative effect on your budget. Spending beyond what you can afford and running up costly debt must be limited to lead a healthy financial life, according to financial experts.
Spending beyond your means can also distract you from your financial goals. Coupled with growing inflation and rising interest rates, overspending has the potential to push more people into high-interest credit-card debt, personal finance experts say.
Shopping is the primary reason people overspend, with 54 per cent of respondents admitting to this, according to a survey by TD Bank of 1,000 American credit-card holders in March this year.
The percentage of consumers who reported overspending on dining out at restaurants and bars tripled compared with 2021, the survey found. While consumers did not report overspending on entertainment purchases such as movies or concert tickets last year, 10 per cent now say this is an area where they overindulge, the findings revealed.
We asked personal finance experts to list common reasons that cause people to overspend and suggest changes that can be made to overcome the habit.
People are social beings; it might therefore be difficult to decline invitations to parties or dinners, says Devesh Mamtani, chief market strategist at Century Financial in Dubai.
“Sharing our financial goals with individuals who will relate to the situation is one method to prevent habitual overspending,” he says.
However, if a friend’s idea of fun invariably involves spending and they make disparaging comments about your car (or other possessions) or don’t respect your budget, it might be time to find a more supportive group of friends, says Rupert Connor, partner at Abacus Financial Consultants.
Many people believe that society will see them less favourably if they deviate from "keeping up with the Joneses", Mr Mamtani says.
“To live up to society’s norms rather than your own is not the best course of action, because society does not pay your bills,” he says.
Most families overspend because they want to keep up with their friends and relatives, according to Aadil Kadri, associate vice president at insurance broker Continental Group.
“I know families who are struggling to pay monthly instalments for expensive cars and stopped regular investments to keep up with their loan payments,” Mr Kadri says.
“One should not splurge and overspend to impress others. Accept the fact that expenses should not be beyond your capacity to pay back.”
Boredom is a major cause of overspending and until it’s pointed out, most people don’t realise how much of a problem it can be, Mr Connor says.
“Unfortunately, this is one of the hardest causes of overspending to conquer because it requires a surprising amount of self-discipline and effort to avoid boredom,” he says.
“It’s best to figure out the situations in life that result in boredom and try to fill them with a more productive habit, such as finding a workout partner and hitting the gym every day after work, starting a side hustle or part-time job or trying to build a business.”
Most of us are impulsive and spend without having a budget in place or understanding the after-effects of the purchase, Mr Kadri says.
Spend only on products and services you need now or in the immediate future. Control impulsive spending and postpone the decision to buy on the same day, he suggests.
People tend to get carried away with buy-one-get-one-free offers and discounts designed to motivate them to overspend, according to Mr Kadri from Continental Group.
“People spend more than needed on offers such as spend a minimum of Dh200 and get 25 per cent off,” he says.
“To be eligible for this 25 per cent discount, you have to buy from the same store again, which eventually leads us to spend more. It’s a vicious cycle.”
Advertising conveys the idea that we need to look a specific way to be presentable, Mr Mamtani says.
There is the idea that to be happier, we need more, he says. But accepting this messaging might result in high credit-card debt, Mr Mamtani says.
“When aiming to remain within budget, place more emphasis on needs rather than wants,” he says.
Misuse of credit cards, BNPL schemes
Although credit cards provide convenience and make keeping track of expenses simple, they also provide a path to massive debt, Mr Mamtani says.
Individuals who pay with a credit card instead of cash can spend up to 18 per cent more, he says, citing research by US data analytics company Dun & Bradstreet.
“Halt the cycle: use cash when shopping in places where you tend to splurge to force yourself to stay inside your spending limit,” Mr Mamtani says.
Credit cards encourage you to spend more and offer options to pay only the minimum monthly instalment, Mr Kadri says.
Banks will only earn if you pay the minimum amount on your balance, so they will encourage consumers to do it, he says.
“Buy-now-pay-later strategies have been the talk of the town, especially in the automotive industry,” he says.
“Do not get carried away with such offers unless you really need the product.”
People tend to frequently overspend on special events, such as birthdays or Christmas.
By setting up special savings accounts designated exclusively for certain expenses, such as birthdays, you can budget for occasional costs, Mr Mamtani says.
“Have you noticed how many luxury holidays people in the UAE seem to take compared with counterparts living in their home country?” Mr Connor says.
“A cap needs to be placed on excessive spending in this way or else it will eat away at everything that is being earned. The key to stopping spending too much money in these ways is to create better money habits in your daily life.”
Try to replace these activities and habits with a more virtuous way of living, he says.
Creating spending rules is perhaps a more effective way, rather than coming up with a plan that puts a restriction on how much you can spend, Mr Connor says.
A budget can be a numerical rule that’s hard to follow because it encompasses all our different expenses, he says.
“Action-based rules tend to be easier to maintain over the long term. An example of this rule is to only pay with cash when you go out to eat with friends — this way, you can’t overspend because you literally don’t have the money.”
Ignoring petty expenses
Most people tend to ignore petty expenses, Mr Kadri says.
“For instance, people use their car to go to nearby or walkable locations. Or, most individuals use Salik even on public holidays when there is relatively no traffic. Try to use alternative roads when one is not in a hurry,” he says.
“Avoid wasting utilities such as the air conditioner and electricity and switch off appliances when not needed. Also, avoid buying expensive gifts on birthdays, anniversaries and other celebrations.”
Lending money to friends
It’s important to help friends, but it’s even more important to take care of one’s financial health, Mr Connor says.
Always track your loans to friends closely and make sure they stay within a balanced budget, he suggests.
“Also, be clear about whether it is a loan or a gift and set expectations accordingly,” Mr Connor says.
“To remove all risk, it is best not to loan money to friends at all. If you do, then ask them to sign a document if it is a large amount.”