Overspending or Underspending? How to Find Your Right Spending Balance

Spending too much? Too little? The way to solve two opposite yet pervasive problems is to stay on the narrow and winding right path.

We had just moved halfway around the world, to West Texas, of all places.

My wife wasn’t allowed to work, so our young family had to survive on $31k a year, which wasn’t easy.

Then, my wife started grad school, making things even tighter. In those years, despite being extremely frugal (think $0.20 supermarket ramen noodle packets as dinner), we spent too much.

Many years later, I had to change my spending mindset.

It was no easier to learn how to not over-control our spending and enjoy the things our current financial situation allows us to afford.

Here are some thoughts on both sides of this mindset management challenge.

What Is the Impact of Overspending on Your Finances?

This one is so straightforward that you’d think we’d all be much better at it than the data proves. Clearly, if you can’t afford something, you shouldn’t buy it, right?

Yet survey after survey shows how tens and hundreds of millions of us do exactly the opposite, putting themselves into a downward spiral, going deeper and deeper into debt. Sometimes, this leads to one or more bankruptcies.

This basically means that people are stealing from their future selves to pay for their current needs and wants. This may be because their income doesn’t keep up with the minimum required to live in their communities.

Or it could be because they’re induced to sell their future prosperity to enrich others.

Why would anyone allow this?

Why Do We Overspend? 4 Common Culprits

In a consumerist society like ours, it’s hard not to overspend. Here are some of the biggest culprits:

• Constant bombardment by ads and marketing messages: According to Zippia, “The average American is exposed to 4,000-10,000 ads per day.” Social media “influencers” get paid handsomely to get products and brands in front of their followers, knowing this will drive sales. Another factor here is when you see many friends buying a high-end brand, you likely feel subtle pressure to join them and buy the same brand.
• ‘Keeping up with the Joneses’: When meeting someone for the first time, we make snap judgments about them, often affected by what they wear, the car they drive, their home, etc. This leads to pressure to have nice things to demonstrate status – for example, when was the last time you saw a realtor driving a clunker? As written by humorist Robert Quillen in 1928, “[You use] money you haven’t earned to buy things you don’t need to impress people you don’t like.”
• Retail therapy: Journalist Mary T. Schmich is credited with one of the first uses of this term in a 1986 Chicago Tribune column. Retail therapy is a tongue-in-cheek reference to going shopping as a way of improving your mood. Finding and taking home something new that we fancy gives us a sense of newness, a quick jolt of positivity in what may otherwise be a drab or even depressing existence. Factors such as how well we can afford the purchase or if we need this new item fall by the wayside. This factor is well known to retailers, who arrange (and frequently rearrange) their wares in ways that keep you in the store longer and expose you to as many colorful and attractive displays as possible.
• Easy access and reduced immediate pain: Retailers are well aware that sales go up when “friction” goes down. Friction is anything that you have to do from the moment you feel the urge to buy something until money changes hands. For example, Amazon stores your credit card info and offers “single-click” purchasing to reduce friction to the absolute minimum. You see something you fancy and with a single mouse click, the purchase is a done deal. Even better from their perspective, the fact that you don’t have to pull out your wallet and hand over cash, or even pull out a credit card, separates the happiness of getting that new item from the (eventual) pain of dealing with your overspending.

It’s well known that nearly 70 percent of the US economy is built on consumer spending.

When your current income doesn’t let you carry your “fair share” of that spending, you’re cleverly assisted and encouraged to pull additional resources from your future self, in essence selling off your future prosperity to support the current prosperity of corporations and their owners.

How to Stop Overspending: A 4-Step Conscious Spending System

The first step to avoid overspending is to accept our human failings and to recognize that others are ready, willing, and able to manipulate our emotions to get us to do what’s in their best interest rather than ours.

Then, we need to put in place systems and processes that will help us stay on the track we decide is best for us and our families.

For example:

Step 1: Use something like Ramit Sethi’s four-category “conscious spending plan” system, e.g.:

• 50 percent for non-discretionary costs or “fixed expenses” (can be, e.g., 55 or 60 percent).
• 20 percent for “guilt-free spending” on things you don’t have to buy (can be, e.g., 30 if your other categories allow). Note that this category includes charity.
• 20 percent for investing for the future (can be, e.g., 10 percent if you’re ahead of where your retirement plan says you should be given when you want to retire).
• 10 percent savings for big-ticket items resulting from emergencies or opportunities (can be, e.g., 5 percent if your emergency fund is large enough).

Step 2: Review your spending and sort it into five buckets:

1. Things you must buy where the cost can’t be reduced.
2. Things you need but can replace with cheaper alternatives and/or reduce quantity.
3. Things you don’t need but want even at the same cost (i.e., something you value highly).
4. Things you don’t need but want if you can reduce costs by replacing them with cheaper alternatives and/or reducing quantity.
5. Things you don’t need and don’t prioritize over future prosperity.

Step 3: Once you finish this process, decide on changes that align your spending with what Step 1 says you can achieve:

• Keep bucket 1 above as-is.
• Change bucket 2 items and/or quantities to reduce costs as possible.
• Keep bucket 3 as-is to the extent you can fit it within your guilt-free allocation.
• Change bucket 4 to reduce costs as much as possible and keep it only to the extent it fits within your guilt-free allocation.
• Stop spending on bucket 5.

Step 4: Automate as much as possible:

• Set up automatic transfers to your investments and savings – this “pay yourself first approach” makes it harder to impulsively spend more than you planned.
• Set up your own personal set of financial rules – e.g., what will you never buy, what will you always buy regardless of price (within reason given your resources), what will you buy periodically, etc. Making these in-principle decisions ahead of time reduces your risk of spending on “shiny objects” just because a marketing message caught you unaware.

What Financial Advisors Say About Overspending

Kevin M. Arquette, CFP, Wealth Manager, Managing Partner, Wealthpoint Financial Planning, says:

Peter G. Bobolia, CFP, ChFC, Financial Planner, Family First Financial Planning, shares:

Jeff Hall, CFP, CIMA, CKA, Partner & Senior Advisor, Rather & Kittrell adds:

What Is the Impact of Underspending?

The overwhelming majority of Americans don’t have to worry too much about this one for most of their lives. However, it’s worth pondering even if you don’t (yet) have to worry about it.

Imagine how you’d change your financial choices if money stopped being a constraint.

• What would bring you joy that you can’t fit into your guilt-free spending?
• What would your life be like if you could buy those products, services, and/or experiences?
• How would your stress level drop if you could be confident that no financial fallout would result from letting yourself spend on those things?

Now imagine needlessly forgoing all that happiness and enjoyment you could experience simply because you’re locked in a scarcity mindset that no longer serves you.

That’s the impact of underspending – the tragedy of needlessly living a poorer, smaller life than your circumstances allow.

Why Do Some People Spend Too Little and Save Too Much?

Here too, the reasons are mostly mindset-related and include e.g.:

• You soaked up a scarcity mindset from your parents and can’t bring yourself to spend so much on what they’d have considered frivolous luxuries and never consciously questioned them.
• Money-related habits you developed over a lifetime of trying to build wealth aren’t appropriate to your new financial circumstances, but you haven’t consciously worked on replacing them.
• You over-emphasize your future self’s luxury over your current self’s appropriate joy. This is the path for many adherents of FIRE — Financial Independence, Retire Early.
• You feel anxious about the future, possibly related to the above and/or to the intrinsic lack of control over future events (e.g., economic crises, changes in tax laws, sudden illness, etc.).
• You have nonconscious beliefs about money and rich people that get in the way of allowing yourself to spend money you can afford on luxuries you’d enjoy and value.

How to Stop Underspending When You Can Afford to Enjoy Life

Since the reasons relate mostly to your mindset and nonconscious beliefs, the best path is to proactively think about them and discuss them with your spouse, trusted friends, a coach, and/or a good therapist.

Ask yourself what meaning you attribute to spending a lot of money on the things on which you’re underspending. Then, consider if those meanings may no longer be accurate given your current financial circumstances, experience, and wisdom you collected and developed over time.

What Financial Advisors Say About Underspending

Marianne M. Nolte, CFP, Imagine Financial Services, relates, “A client regularly says, ’I’m turning into my dad.’ His father would say, ‘A car just needs to get you from point A to point B.’ In other words, nothing fancy is required. He always wanted a Corvette. During his college years (eating peanut butter sandwiches to survive his poverty), he kept a poster above his desk that read, ‘The Rewards of a Higher Education,’ which included an image of a Corvette. Today, he’s a well-compensated executive. However, he drives a 2015 pickup truck instead of a Corvette. In his mind, it’s functional, he owns it outright, and it gets him from A to B.

Arquette says:

Chris Shoup, CFP, Founder & Financial Planner, Southshore Financial Planning, offers another example:

Bobolia adds:

Angela Dorsey, CFP, MBA, Financial Planner, Dorsey Wealth Management, rounds things off with an interesting anecdote, “In retirement, it’s important to not overspend but also to enjoy your retirement years and not underspend! After using a money personality quiz, I discovered my client had a ‘miser’ money personality type. He and his wife had plenty of money for retirement, but he refused to take her on a cruise! Going on a cruise was very important to her, but he had saved and scrimped all his life and felt uncomfortable spending money. After we reviewed their retirement projection, I told him with his wife present that they have plenty of money to retire, and he must take her on a cruise! I made that a task in his plan. Sometimes clients who saved all their lives need to be encouraged to spend money.”

How to Find the Right Balance Between Overspending and Underspending

For any given personal circumstances, goals, and priorities, there’s a broad range of possible underspending and an even broader range of possible overspending.

The path of moderation between those extremes is where you want to live.

Unfortunately, what’s “right” for you is too little for many others and too much for yet more others, so you have to figure out your own right path.

Worse yet, what’s “right” for you in the present could have been too much last year and may be too little next year and again too much a few years later, so you have to keep adapting.

The path of moderation is thus narrow and winding.

The best way to stay on this challenging path is through the above-mentioned “conscious spending plan.” This plan helps you automatically adjust to changes in your income and net worth, keeping you close to where you need to be financially.

The Bottom Line: Spending in Moderation Is a Moving Target

Roman stoic philosopher Seneca the Younger said, “Everything that exceeds the bounds of moderation has an unstable foundation.” In other words, strive for moderation in all things.

This holds for your spending.

Spend too much, and you could end up bankrupt and poor.

Spend too little, and you may never allow yourself to enjoy things you can afford; you may even drive away friends who’d otherwise enjoy going out with you but feel put off by your over-frugal (not to say cheap) ways.

However, since too much and too little are defined by your (ever-changing) financial circumstances and obligations, the narrow path of moderation is a moving target, making it far too easy to stray.

Malissa Marshall, CFP, MST, EA, Founder of Soaring Wealth, sums things up nicely, “As a financial advisor, it’s not my job to tell clients that they’re over- or underspending in any absolute sense. My job is to remind them of the personal goals they set for themselves and let them know when their spending habits either jeopardize those goals, or they’re being far too cautious and can afford to enjoy their lives a little more.

To successfully stick with moderation, follow the above-described process to set up as automated a system as possible that lets you spend what you can without guilt or shame while keeping you from overspending relative to your circumstances, goals, and priorities. And as Marshall says, having an accountability partner can be helpful.

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