Welcome to Part 2 of my interview with Dr. Alec Baker of Peak Living Psychology. Today we tackle one of my favorite topics of mind and money – the act of consistently outspending income.
KS: When people spend outside of their means, what is at the root of that?
AB: People’s spending behavior is generally related to their core beliefs. People who spend more than they make are often either in denial of their financial reality or have some plausible reason why overspending doesn’t matter.
For instance, you might have a single income family where the primary earner insists paying for the top tier TV package with all of the bells and whistles because that is their reward for working hard and if they can’t afford that their all of their hard work is for nothing. To admit that they can’t afford it would be deflating and lead to a sense of failure for that person.
As a result, they refuse to make a different choice and run a deficit on the family credit card each month that leads to truly problematic debt in the long run. This sort of denial and AVOIDANCE is a common emotional response to an impossible or undesirable situation.
In another example, we can see that a sort of magical thinking about spending can give someone that plausible deniability that what they are doing will be ok in the long run. Imagine a 30-something couple with two incomes and no children. They love to travel the world and are both very optimistic about their future earning prospects. One owns a business that is still growing and has a future earning potential of around $250k per year. The other has just finished professional training school and expects to be making more year over year for the next five years or so.
These two have lots of optimism, so they take a trip to “Yacht Week” in Croatia that costs $7k per person and they add a stop in Paris for five days that adds an additional $2k per person because, c’est la vie! They believe they won’t be able to enjoy it in five years because they might have kids and all sorts of other obligations and since the future is bright they don’t think much of the expense.
Even though their future earnings could support spending $18k in two weeks, their current earnings are closer to $125k combined and they have to do the whole thing on credit. In the meantime, their balances are stubborn and their paying hundreds of dollars in interest payments.
KS: There you have it. Overspending your income has lots of reasons and doesn’t make you a bad person. But, not recognizing the habit and digging yourself into lots of credit card debt or not having emergency savings will have long term negative consequences.
Stay tuned for next month’s installation about characteristics of people with great money habits.
Dr. Alec Baker owns and operates Peak Living Psychology – a full service psychological services practice located in South Denver. Peak Living Psychology offers financial therapy, traditional psychotherapy, and psychological assessment services to the Denver metro area with a focus on helping individuals and families cultivate the best things in life. More information can be found at alecbakerpsyd.com