In an economy like ours—driven by consumer spending and near-ubiquitous advertising designed to get you to spend, and then spend some more—even the most financially disciplined among us can fall prey to overspending. For example, most of us are especially vulnerable during the holiday shopping season, during which many of us spend more money in 30 days than we have in the previous six months combined. To avoid a financial hangover after a serious shopping binge, here’s a plan—let’s call it a spending rehab intervention—to sober up your finances and get your budget back under control.
Spending Rehab Step 1
You have to be woke—more conscious and aware—when it comes to how you are spending your money. Most of us spend money mindlessly, without really considering the impact on our financial health, or even whether we really need or want what we purchase. That’s the very definition of impulse spending.
So, to begin the spending rehab regimen, for one month you’re going to track your spending (which is a good idea to do two to three time a year even if you don’t overspend). Keep a record of every penny you spend, and what you spent it on. Also, note how you made each purchase—with cash, credit card, debit card, personal check, automated payment, whatever. You can track your spending using a pen and small notepad, or your mobile device or computer. Using an app like Spendr might also help. Do whatever works to have a complete record of your spending for one month.
Spending Rehab Step 2
This is where we test your commitment to getting your spending under control: Continue to track your spending for a second month, with one change—no using credit cards. That’s right; you have to go cash only for the entire month. Debit cards are OK, too, since you are just using plastic to spend cash. But no using credit cards or other tools to borrow money to finance expenditures for the entire month.
As with the previous month, keep a record of every penny you spend, and what you spent it on. Use a pen and pad, your mobile device, whatever works to have a complete record of your spending—without using credit cards.
—Be sure to catch Alfred Edmond Jr.’s personal finance podcast: “Your Money, Your Life” sponsored by Prudential.
For those who have become accustomed to treating their available credit balance as if it were income, this might be the toughest part of spending rehab. Brace yourself for the withdrawal pains of giving up the plastic. If you literally can’t make it through one month without using credit cards, you need emergency intervention. Make an appointment with a qualified credit counselor immediately. You can find one in your area at DebtAdvice.org.
Spending Rehab Step 3
Sit down and look at your spending choices over the two months. How did your spending differ from one month to the next? Have you been too reliant on credit cards, or using them needlessly when you could have used cash and avoided wasting money on paying interest on credit card balances? Where in your budget can you eliminate spending (or at least avoid paying interest and fees), and where can you better apply that money to more beneficial, financially healthy uses—such as paying down debt faster, increasing contributions to your retirement savings, building a stronger cash emergency fund or financing a new money-making venture?
The point of this exercise is to make you more conscious of how you spend, what you buy, and most importantly, why—so you can challenge and change your thinking and adopt a healthier financial lifestyle. To get started, you want to identify and eliminate three kinds of spending—confused spending, compensatory spending, and conspicuous spending—if you are serious about improving and maintaining your financial wellness:
Confused Spending
This is when you make purchases without giving any real consideration to what you are getting for your money—or whether you even really want or need what you are buying. Confused spending almost always results in overspending.
Are you repeatedly surprised when you bounce a check, the ATM gives you a negative balance message or your credit card is declined at a store? That likely means that you are either operating without a spending plan—also known as a budget—or you have one, and are ignoring it, and instead, you are trying to keep track of it all in your head. The result: sloppiness, disorganization—and confused spending.
Compensatory Spending
This is when you spend as a form of self-medication in order to cope with emotional pain or discomfort, such as boredom, feelings of unworthiness, sadness, or repressed anger. The problem with this so-called “retail therapy” is that when you’re done, the bad feelings return, often more intensely, requiring more spending to cope—and leading to shopping addiction.
At its worst, compensatory spending leads to a vicious cycle: You feel bad, whether sad, angry, lonely or just plain bored. You go shopping to feel better—spending money you don’t have on things you have not budgeted for. When the high of getting so-called great deals wears off, you now have shopper’s remorse and guilt, on top of the original bad feelings. What do you do? Unless there is an intervention—more compensatory spending. If this is you, get help; a good place to start is the nonprofit self-help organization Debtors Anonymous.
Conspicuous Spending
This is when you spend in order to buy social status—to try to impress others, “keep up with the Joneses,” or maybe do a little frontin’ for the ‘Gram. If you rock nothing but luxury brands but have horrible credit, this is likely you.
Your friend or neighbor has the new custom kicks or latest smartphone, so you have to have it, too—whether you can afford it or not. This tendency can be exacerbated by engaging social media, where it is easier than ever to see the latest shiny new things that seemingly everyone but you has, including tons of approval in the form of likes, favorites, and shares.
Statistics show that you’re likely racing each other to the poor house. Unfortunately, too many of us spend money we don’t have to buy things we can’t afford, to impress people we don’t know and may not even like. Stay in your lane and live according to what you can afford, not by what others have.
How do you determine affordability? By continuing to monitor your spending, being more organized, sticking to a real spending plan, and otherwise staying woke when it comes to your money. The more diligent, consistent, and conscious you are, the lower the odds that you will relapse into overspending, and the less likely you’ll need another round of spending rehab.
—Be sure to catch Alfred Edmond Jr.’s personal finance podcast: “Your Money, Your Life” sponsored by Prudential.