The Psychology of Overspending – Why do people do it?

Overspending. Why do people still do it, if it’s so detrimental to our financial health?

Could it be that temporary high, that euphoric moment and the rush of adrenaline? How many of us are familiar with these feelings whenever we purchase something?

But oops, bummer. It all dies down the moment the parcel arrives. That 3rd bag goes into the closet – never seeing daylight again, and you convince yourself you’ll need it – “just in case”.

Is this behaviour more common than we think?

A study done in 2014 shows that we make 40-80% of our purchases on impulse, and 95% of our daily decisions unconsciously.

That’s a huge leakage in our wallets – right there. Before the month ends, we’ve run out of money.

Some of you might disagree. It’s a matter of choice and sound financial management, you say. It’s a conscious decision to not fall for their marketing gimmick. And it’s our fault for getting ensnared by the so-called deals and discounts that companies are throwing at us – left, right and center. We’re expected to dodge all these bullets when they’re coming at us like gatling guns.

And this is how we behave sometimes.

So, what gives? Of course, this article is not to dispute that while consumers have every right and decision making awareness to choose and to simply walk away from a deal, it is also a fact that many fall victim to overspending. The purpose of this writing is to understand why buyers or shoppers, as we coin the term literally – spend the way they do.

In this time of age where information is readily available, we are constantly bombarded with carefully crafted messages from brands and companies in their attempt to influence our spending habits. The ease of transmitting messages through the internet has also made most of us vulnerable to making some regrettable purchases in our life. 

Here are some insights on the psychology behind why we overspend and how we can curb the impulse.

1. Decision Fatigue

According to Roy Baumeister, a researcher who studies decision fatigue, making decisions requires the same willpower as saying no to unhealthy choices. Everyone has a set amount of willpower and once depleted, the quality of the decisions that we make starts to plummet, same goes for purchases. We tend to spend more recklessly after a long day of brainwork because all the willpower has gone into performing the daily tasks and nothing left for disciplining purchase decisions.   

Here are some suggestions that you and I can implement in order to avoid overspending:

  • Avoid going shopping after a full day of work. Instead, do it on weekends or your off day mornings when your mind is still fresh.
  • Have a shopping checklist, a spending budget and commit to it.
  • Willpower is like your muscles; being conscious in exercising discipline would strengthen it and make it less taxing to resist impulse purchases the next time.

2. Social Pressure

Humans are social creatures and thus, very susceptible to social pressure. We tend to mirror what we see and give in to behaviours that might not necessarily be the best of us, especially for our wallets.

Let’s face it, how many times have you given in when you’re at a gathering with friends, and everyone ordered some expensive drinks that are straight-up, not worth the price, but you still went along and ordered anyway? The fear of missing out (FOMO) clouds our financial rationale, causing us to overspend on items we do not normally purchase – just to fit in.

Another example would be festive seasons when you receive a gift from others. It then becomes an obligation to return the favour with the gift costing at least the same as the one you received, if not more.

The key to tackling this phenomenon is to free yourself from caring too much about what other people think of you. Very often, it is our pride that’s stopping us from being honest with ourselves that our current financial situation might not live up to society’s expectations of what constitutes as an “acceptable” gift.

3. Scarcity

The scarcity principle basically states that people tend to have more desire for things that are less available, according to Professor Dalakas, who specialises in Consumer Psychology. In the context of buying decisions, marketers are adept at crafting messages that portray the products as being scarce in order to capture the attention of buyers. Some common examples that can be seen year-round are as follow: 

  • Limited time offer!
  • Seasonal stock!
  • One-of-a-kind edition!
  • Expiring soon!
  • Promotion ends today!

Given the claims may or may not be true, these messages subconsciously pressure buyers like you and me into making prompt purchase decisions so that we would not miss out on a “good deal” because it might no longer be available.

Therefore, only spend on what is necessary and not give in to the fear of missing out. Chances are, they sing the same tune every day, for every campaign they hold. Just click on to popular e-commerce sites and you’ll perpetually see discounts or items on offer.

Are they really the “once-in-a-lifetime deal” they make themselves out to be? Most likely not.

4. Anchoring

In sales, anchoring is a psychological phenomenon that is widely used to influence buyers’ expectations. This is found especially in terms of pricing, which in turn fosters more overspending tendencies.

A good example of anchoring would be the promotional signage that we see at retail and online stores. How does anchoring work? The common strategy of anchoring starts with showing the original price of say RM1,000. Then, it follows with a discounted price that is coupled with the scarcity principle (say RM500 if the buyers make a decision today).

Now, in the mind of the buyer, the product has already been “anchored” at the price of RM1,000. In addition, they’ve been told if they make the purchase today, they will be able to save a hefty RM500. This phenomenon shifts their focus from “Paying RM500” to “Saving RM500” – if they do it TODAY.

Having a clear mind about getting only what is necessary, along with a shopping checklist, would help to encourage sound purchase decisions and prevent overspending.

5. Hard cash versus E-wallets

Similar to credit cards, e-wallets have become increasingly popular worldwide. The various perks and rewards that come along with the usage encourage users to be more receptive to the concept.

However, with the convenience it brings, there’s a catch – we actually spend more despite all the cashback and rewards. It stems from the anchoring concept that was mentioned previously. E-wallet companies are smart enough to entice users with their reward system and causes us to lose focus on the amount spent.

In fact, e-wallet companies have also resorted to gamification to entice users to spend more. It comes in the form of campaigns, contests or mini weekly challenges to get you to do one thing – spend. Spend up to X amount to stand a chance at winning a prize, or reload X amount to receive a couple of ringgit cashback. Sounds familiar?

Unlike cold hard cash that we can actually hold, the money that we spend through our e-wallets does not have as much as a profound effect on our minds. This is especially so if we reload our e-wallets using credit cards. Eventually, this causes overspending if there’s a lack of awareness of our financial state. Plus, not having proper budgeting strategies and financial goals in place is a highway to financial Doomsville.

With that said, should consumers resign to this and play victim when they overspend? Absolutely not. While we beat the race to financial freedom, it is important to understand why people spend the way they do. And the fact that companies know exactly how buyers behave, the more they are able to leverage this knowledge to their advantage in their marketing and pricing strategies.

What’s next?

If you would like to know more about how to curb overspending habits, do not hesitate to seek professional advice from your local financial advisory. We are always available and ready to help our readers to achieve financial fitness and freedom.

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