Karen Simpson writes for J.G. Wentworth, a settlement funding company and the largest purchaser of future payments to individuals who hold assets in the form of structured settlements and annuities.
Many of us make and spend money because we must if we want to survive. Food, clothing, and shelter all come with a price tag attached and most societies require you to pull your weight if you want to live according to your own terms. However, when you get into the territory of spending more money than you make, your poor financial decisions are likely based on emotional buying rather than actual necessity; and this can quickly become a problem. In a culture that relies heavily on credit, living within your means is something that you must learn to do, but if you can learn to recognize when your financial decisions are based on emotion, you can work to stop wasteful spending and get back to living your life in comfort and without debt. Here are a few things to watch out for.
1. Buying for status.
A house in the Hollywood hills and a brand new Ferrari are well and good if you’re a famous director or plastic surgeon, but most of us can’t really afford these high-end assets. Get your head out of the clouds: paying for a label is stupid, whether you have the money or not (but especially if you don’t). Just because you want something doesn’t mean you can have it, and frankly, you’ll probably be a lot happier if you don’t have that particular Sword of Damocles hanging over your head. Living well but within your means comes with its own rewards; namely peace of mind.
2. Buying for pleasure.
Many, many people like to participate in “retail therapy”, or making unnecessary purchases as a way to feel better. Sadly, this type of shopping is often followed by feelings of guilt, so that the buyer ends up in a worse state than when they started. In order to avoid this type of spending, you will likely need to cut up your credit cards. You should also consider seeing a therapist since this type of spending is often classified as addictive behavior and therefore may necessitate outside help to conquer.
3. Buying on impulse.
Your purchase may seem like a great deal at the time, but buying on impulse is never a good idea. If you’re not thinking clearly about what you’re getting (or why), you will likely end up with something that never gets used, despite your good intentions. So really you’re just throwing money away. And if you buy on credit, chances are you’re going to end up spending a lot more than you originally intended (thanks to interest).
4. Accruing bad debt.
Some types of debt are good. Buying a home and starting a business fall into this category because they generally have the potential to show a solid return on investment. But building up credit card debt for items that you don’t really need and can’t get your money back for falls under the heading of “bad” debt.
5. Making loans.
This is one of the worst types of emotional spending because it often leads to fissures in close relationships. Loaning money to a friend or family member in need is likely 100% motivated by emotion. And that is why it’s so detrimental. It often involves issues of love and trust. And when borrowers fail to pay you back (as they often do because they know you won’t come after them the same way a bank will), you will not only lose money, but also a relationship.