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  • Emily Friday

The Psychology Behind Overspending | Understanding The Hidden Reasons Behind Overspending Habits

Ever found yourself staring at your bank statement for the month, wondering where all your money went?

If so, you’re not alone. Overspending is a common issue that many of us grapple with.

But, why do we do it?

What drives us to spend beyond our means?

The answers lie deep within the complexities of human psychology, and to kick off #WorldWellbeingWeek, we're delving into some of the scientific reasons behind why we overspend to help those struggling with their financial well-being due to bad spending habits.

1) The Pleasure Principle | Instant Gratification

One of the main psychological factors behind overspending is the pursuit of a little something known as instant gratification. When we buy something new, our brain releases dopamine, a neurotransmitter associated with pleasure and reward. This rush of dopamine creates a temporary high, making us feel good in the moment. Unfortunately, this high is fleeting - and as a result, often leads us to a cycle of more overspending to try and recapture that feeling!

According to Numerica, surges in dopamine can arise even just by thinking about shopping - in other words, it's not just the purchase that makes us feel good. It's also the thrill itself of the hunt for that perfect item!

2) Social Influence | Keeping Up with the Joneses

It's no secret that humans are inherently social creatures, and the people we spend time around (or, accounts that we regularly engage with on social media) often influence our spending habits without us even realising it. The desire to fit in and keep up with peers can drive us to spend money on things we might not otherwise consider, and social media exacerbates this effect by constantly showcasing curated highlights of others’ lives.

This is why having influencers market a product to their audience is so effective - seeing our favourite influencer using a specific product, or living the life we could only dream of, makes us feel like we need to also spend to match the lifestyle we see online!

3) Emotional Spending | Retail Therapy

One of the other more obvious reasons for overspending is, of course, the role of our emotional states when shopping. Emotions play a significant role in our spending habits, as whether we're feeling down, stressed, anxious, or even excited, we might turn to shopping as a way to cope. This behaviour, commonly known as 'retail therapy', provides a temporary emotional boost.

However, just like the pleasure principle, the relief is short-lived, and the underlying issues remain unresolved. This again potentially leads to more spending in an attempt to maintain that short but sweet sense of comfort.

4) Cognitive Biases | The Lure of Sales and Discounts

Did you know that our brains are wired with certain cognitive biases that can lead us to overspend? One example of this bias, the 'anchoring effect', is where we rely too heavily on the first piece of information we receive (the anchor) when making decisions. For example, if a £200 jacket is marked down to £100, we perceive it as a great deal, even if we didn’t need a new jacket in the first place!

Similarly, the 'scarcity principle' makes us value items more if we believe they are in limited supply, prompting us to buy things we don’t necessarily need and therefore spending beyond our means.

5) Financial Illiteracy | Lack of Understanding

A lack of financial education, usually starting from childhood, can also contribute to overspending as adults. Many people aren’t taught how to budget, save, or manage their finances effectively, and without a clear understanding of how to manage money, it’s easy to fall into the trap of spending more than we earn.

Financial illiteracy can lead to a cycle of debt and financial stress, further exacerbating the problem of spending more than we can afford.

6) The Credit Card Trap: Buy Now, Pay Later

If you've ever spread the cost of a purchase by using popular BNPL schemes like Klarna, you'll know all too well how credit cards can make it incredibly easy to overspend!

The concept of 'buy now, pay later' can detach us from the reality of our spending, making it easier to make impulsive purchases. Additionally, the minimum payment option on credit cards can create a false sense of affordability, leading to increased debt over time.

7) Lifestyle Creep | Gradual Increase in Spending

As our income increases, so do our spending habits: and this is a phenomenon known as 'lifestyle creep'. When we earn more, we tend to upgrade our lifestyle - nicer cars, bigger homes, more luxurious vacations. This gradual increase in spending can quickly absorb any extra income, making it seem like we’re not actually earning more (and keeping us in a cycle of living paycheck to paycheck).

8) Psychological Ownership: Attachment to Possessions

Finally, 'psychological ownership' refers to the feeling of possession we can develop towards our belongings. Once we imagine owning something, it can be difficult to let go of the idea, leading us to make purchases we didn’t initially plan on. This phenomenon is especially strong when we make physical contact with items, like trying on clothes or test-driving a car, making it harder to resist buying said item!

Overspending is a complex behaviour influenced by a combination of psychological factors. By understanding the science behind why we spend more than we should, we can take steps to change our habits and make more mindful financial decisions. Remember, the key to financial well-being isn’t just about how much you earn, but how wisely you manage and spend your money.

Stay tuned for Part Two of this series coming soon where we share some practical tips to beat these psychological tricks and how to curb your overspending tendencies for good (follow us on Instagram to see it first!).


Looking for a tool to help you cut back on overspending?

With the ImageNPay app, you'll have access to a prepaid card that you top up with only the amount you can afford to keep overspending to a minimum - no interest fees, no debt, no overspending!

Tap the button below to find out more and download the app FREE on iOS and Android!

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