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Overspending and debt: breaking the cycle

By July 24, 2019 No Comments
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We’ve all been there. From upgrading to the latest smartphone, to that impulse handbag purchase, to leaving the supermarket with way more than what was on our shopping list. Surely one little splurge here and there can’t hurt, right? Wrong.

Small debt can accumulate quickly into a much bigger problem overtime.

Why do we overspend? Your relationship with money and mindset is a huge determining factor when it comes to our spending habits. Below are some common reasons why we overspend and what we can do to stop.

We don’t have a budget.

As boring as it sounds, knowing where your paycheque is going each month and having a budget is essential. Have a look at your bank statements from the last three months to get a good view on where your money is going.

The budgeting tool on sorted.co.nz is a helpful and easy way to keep track of your spending. Give it a go for a few weeks and see how you get on.

Buying on credit has become the norm.

Gone are the days where we would save for a purchase – being in debt and purchasing using credit has become the norm. In an age where we are more impatient than ever and must have it now, most of us will borrow money to buy a car, upgrade our devices and even for holidays.

Just because a loan or credit is readily available and seems like a ‘good deal’ at the time, doesn’t mean you should take it. Interest costs on smaller unsecured consumer lines of credit – such as credit cards and store cards – can seem small, but they can quickly compound and add up. Interest-free periods on purchases can sound really attractive – until they expire, and you’re left with debt at punitive levels of interest, often without realising it. And once you have a card or a line of credit, its all too easy to keep using it.

A good rule to have when it comes to credit is ‘only borrow money to buy things that go up in value’. Therefore getting out a student loan or borrowing to build an asset like a business or a home is “good debt”, and if it’s secured by a good quality asset like a home, it’ll often be cheaper debt too. “Bad debt”, usually used for consumer goods or assets like vehicles that lose value over time, is invariably more expensive and a much bigger constraint on your long-term goals.

The ‘treat yo-self’ mentality.

We talk ourselves into purchases we think we ‘deserve’ or have ‘earned’. What’s worse is that a lot of us are treating ourselves on credit and it’s becoming the norm. That ‘treat yo-self’ mentality and impulse spending can get you in deep, deep debt. Especially in a society where we are addicted to upgrading items from cars to phones, and even convenience – all on credit! If you’ve got more coming out than coming in, at some point that will catch up with you.

Once you see your savings account balance grow, it can be very tempting to spend the money impulsively. Before you make an unplanned purchase, consider what your goals are for the money and if making the purchase will move you closer to or further away from your goals.

We buy on impulse.

Impulse spending has become a key problem especially for online shoppers where alternative payment options like Hire Purchase, Laybuy and Afterpay tempt us into the spending trap. Not to mention in-store purchase decisions that can be swayed by in-the-moment variables like if we’re walking down the aisles of a supermarket hungry.

A good way to combat impulse spending is to follow the 30-day rule. Whenever you feel the urge to splurge – whether it’s for new clothes, a new computer, a new phone or a new car – force yourself to stop. Leave the store or close the website. Have a cold shower. Do whatever you can to avoid the purchase, then take the next 30 days to consider whether you really need it and if you can actually afford it. Read reviews and shop around for better deals and if it still feels like a good idea after a month, go ahead with the purchase – just don’t use credit.

Another way to combat the urge to fill your trolley in-store is to plan ahead with a shopping list and how much you want to spend. Use cash, or a dedicated spending bank account which only has enough in it at any one time for your normal living expenses, and only carry the amount you’ve decided to spend.

We don’t plan for unexpected expenses.

Sudden and unexpected expenses can punch a hole n your budget and knock your finances off track. Car repairs, dentist bills and Christmas gifts are just some examples that can eat away at your yearly savings balances. Unexpected bill pop up (we all know how heading to the dentist can hurt our wallets more than our teeth), and often bigger one-off expenses like travel aren’t property factored for in your monthly budget. Just think – that $12,000 family trip means $500 per month in savings for two years!

wishing tip jar

We don’t save enough.

It turns out us Kiwis’ have pretty bad spending and saving habits. According to a Westpac/Stuff.co.nz survey, one in three kiwis have less than $1,000 saved and four out of 20 don’t have any savings goals. Kiwi’s are among some of the worst savers ranking 26 out of 29 countries based on household forecasting data from the OECD.

If you are struggling to save right now a good place to start is to look at reducing your overheads. Focus first and foremost on paying down expensive consumer debt – which can come with interest rates of 19% or more per annum. Manage your cash carefully – allocated yourself a fixed amount on a weekly basis for your weekly shopping, coffee out, and lunches, and try and stick to that. Look at ways to reduce your households expenses – insurance costs and utilities can often be reduced a bit just by shopping around.

Bigger expenses may require a more considered approach. Mortgage and rental costs are usually the largest single household outgoing. Childcare costs often come next, and one-off costs like travel and entertainment are usually up there too. Mortgage costs can in many cases be helped with good mortgage structure advice. But sometimes stepping back from it all and making more substantive changes, by looking at what really matters, can help the most. Don’t try and stretch that mortgage further for once block closer to that hot new suburb if its going to ruin your life!

Ideally, we should all be saving between 15-20% of our earning which is split into separate funds for retirement, house deposits / car purchases, holidays and an emergency fund for those unexpected bills that pop up.

Breaking the cycle.

The key to breaking the cycle of overspending is to first get a plan. A plan will reduce the likelihood of impulse spending and stop you from underestimating the true cost of what we buy. Begin by doing your absolute hardest to avoid any debt. Don’t get sucked into the long-term trap of paying interest on interest! Build healthy spending habits, create a budget that you can stick to and reward yourself within reason. And if you need a hand with it all – we’re here to help.

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