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5 Oct 2004

The Root Causes of Poor Spending

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by Jesse Mecham

I thought I’d expand on the six root causes of poor spending, as highlighted in “Money for Life”.

  1. Loss of a psychological tie to real money.
  2. Explosion of ways to spend money.
  3. Inability to compare expenses to income.
  4. Lack of training.
  5. Advertising-driven consumption.
  6. Easy access to consumer credit.

Loss of a psychological tie to real money

It seems people have lost their sense of the value of a dollar. It doesn’t hurt anymore when we spend money. The amount of cash that changes hands every day is growing ever-smaller. I’m no different. I use a debit card for the large majority of my transactions. It’s the same as cash – except for the psychological impact.

Author Dave Ramsey says that when you spend with cash it “hurts more.” Also, studies have shown that people spend an average of 18% more when they spend with plastic instead of with cash. McDonald’s doesn’t accept debit cards because it increases serving time (although it does). I’m betting they accept debit cards because people spend more.

How do you get around the danger of spending more with your debit card (we won’t touch credit cards here) because you aren’t using cash? If you operate under the guiding hand of a monthly budget then I think you’re okay. That’s how I justify my use of a debit card. My wife and I budget how much we’re going to spend in each category every month. If we stay under that amount, whether we used a debit card or cash to purchase things, we still stayed under and we’re happy. If we’re having trouble sticking to our budgeted amount for a specific category then we’ll take the cash out of our checking account for that amount and pay for those things in that category with cash. When the cash is gone, we’re done spending. Period.

Try using cash for one of your spending categories for a few months instead of your debit card. See if this 18% result applies to you also. You might find that you too spend more when the psychological impact of a transaction is removed.

Explosion of ways to spend money

Just recently I heard on the radio that Discover Card is partnering with a company that produces a system whereby you could process a transaction with a thumbprint. Woah. Discover Card introduced the keychain credit card which was just oh-so-cute. Instead of having to get out your wallet (psychological impact because of its association with money) you just have to take out your keys! Handy!

This is just one example of a new way to spend your money. I’m sure the thumbprint idea will become mainstream. Instead of having to pull out the keys, you just have to stick your thumb up against a screen. They’ll promote it as a consumer service to stop credit card fraud. That would be helpful. But their primary motive is to give you yet another painless way to spend you hard-earned money.

The internet has given us a great avenue for spending money. On this site how do I collect the money from customers when they purchase something? I use PayPal. The person simply has to enter their payment information. Convenience makes purchasing so easy, that people find themselves going through with it before they’ve evaluated whether they need or can afford what they’re purchasing.

Inability to compare expenses to income

One of the reasons spending has gotten out of hand is because people don’t know how much they’re spending. They get bank statements, credit card statements, online invoices…and if they took the time to add their outflows and subtract that amount from their inflows they would see that they are spending more than they earn. The only way to curb this is to know how much you make and how much you spend.

My wife and I must be weird. We have a little system to track our spending. We budget at the beginning of the month exactly how much we made last month. We lag a month behind. At any rate, we budget how much we’ll spend each month in each category. At the end of the day, if we’ve spent some money that day we’ll put the receipt(s) in an envelope that sits on our bedside table. Every few days we’ll enter the purchases into our YNAB Budget. After that, we usually throw away the receipt. It’s pretty darn simple.

Some people have it out for me when I tell them I save the receipts. They say that’s a waste of time. It’s cumbersome. It’s annoying. I don’t agree at all. While you’re watching TV, I’m taking five minutes to track my spending each week. It does not take long. Second, sticking a receipt in my pocket when I buy something, then emptying my pockets each night when I climb into bed is hardly cumbersome. It takes virtually no thought now. Sure, for the first week or so you have to get used to not throwing the receipt on the floor of your car, but after that it’s pretty much automatic. And it certainly isn’t annoying. What is annoying is having some broke person tell me that they think writing down everything I spend is stupid. That’s annoying.

When you know how much you spend, you will (1) spend less and (2) see any problems you may be having. If your credit card balance is slowly climbing then you are spending more than you earn. MyVesta says that the average American spends $1.22 for every $1 earned. Scary.

Lack of training

I readily admit that there should be some type of formal financial training given to students in high school. Most kids don’t even know how to balance their checkbook. They have no idea what interest is, how it works, and what it can do for or against them. The younger generation needs to learn about money.

However, before we point fingers at the school system for leaving out this necessary curriculum, why don’t we sit back and think about what we can do as parents? The education of your children is still your responsibility when it comes down to it. What are you doing to train your children to be good money managers? Are you a good example? Do you instruct them on proper giving, saving, and spending habits?

If you don’t feel qualified to teach your children about money then you need to begin training yourself. Begin now to educate yourself. Don’t take a passive, blame-everyone-else stance when it comes to learning about money. If your parents were lousy teachers when it came to money then I’m sorry – but move on! You decide what you want to learn. Turn off the television and begin acquiring some knowledge. It will pay you dividends in the end.

If people were just a bit more educated when it came to money, we would not have the rampant consumer problems we have today. The fact that you’re reading this article goes to show that you are anxious to learn something. I admire that. Keep it up.

Advertising-driven consumption.

It’s been said that 70% of purchases are impulse purchases. My wife and I were in a Macey’s grocery store looking for a frozen pizza. Guess what was right next to the pizza? Root beer. We bought some root beer. Retail stores are becoming ever-wiser in how they place items, what signs they put up, what types of promotions they offer and when, to whom, and for how long. I’m not going to delve into the topic of whether advertising is ethical or not. I think it serves a purpose. It lets us know what is out there. What I do want us to be aware of is that we do not have to succumb to the pressure that advertising can place on us. Buck the billboard. Can the commercial. Silence the salesman.

Half of winning the battle against the hoards of advertising that comes our way every single day is to be aware of it. Keep in mind that these people want your money. Protect your wallet as you would your life. Take pride in being able to withstand the enticements placed before you thousands and thousands of times each day. Just say no.

Easy access to consumer credit.

As soon as a high school senior applies for a college, credit card applications begin pouring in. I totally disagree with any institution for higher education that sells this list of applying freshmen to credit card companies. I think it’s totally wrong. They might say the money goes toward their education, or to a good cause, or whatever. I don’t really care. I wouldn’t want to use money that was acquired through such a practice. I think it’s mean and dishonest. I think schools owe more to their prospective students than to subject them to the pressures of credit card companies to begin “building credit.”

If you’re anything like me, you probably get several credit card offers per week. I heard a few weeks ago that someone’s dog was pre-approved for a credit card. Great.

The fact of the matter is the credit card companies know it’s just a numbers game. If they can get you to sign on, the odds of them making a good amount of money off you are pretty high. I know some of you probably use credit cards wisely, paying them off every month, gaining sky miles or whatever your “reward” may be. I choose to not use them at all. The overwhelming majority of Americans would be well served by destroying all of their credit cards–so that is what I promote here.

I don’t see this tidal wave of consumer offerings slowing down any time soon. Perhaps when interest rates rise we’ll see it ebb ever so slightly. Most people have simply made debt payments a part of their life. If you pay cash for an automobile you’re one of a small majority. If you don’t have any credit cards or have zero balances, you’re in an even smaller majority. It’s tough to withstand the pressure of 0% APR for six months, or six months same as cash type of deals. Withstand anyway! Just because credit is easy to obtain does not mean it is worthy of obtaining.

Keep these seven factors in mind as you begin managing your money. Start by saving one month’s expenses. Begin budgeting. Get out of debt. With no payments and a mastery over your money, these causes of poor spending won’t even be an issue and you’ll be well on your way to financial security.

Your Next Step

Remember, budgeting is not restrictive. You won’t be spending less, you’ll be spending right. You can do this! Today. Right now. What do you have to lose? Except all that debt and stress. (Ok, so kind of a lot.)

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