How to identify and stop overspending

Modern technology has made it easier to make purchases anytime and anywhere, whether you're shopping in person or online.

This means that consumers may face an increased risk of overspending. Without using budgeting to control spending, people may face serious financial consequences, including debt and lower credit scores.

Curbing overspending starts with taking an honest look at how you spend your money, as well as setting financial goals to help you use your money purposefully. Below, we'll discuss identifying and overcoming overspending while sharing actionable tips to help you learn how to spend better.

How to identify overspending

While your budget may allow for the occasional planned splurge, repeated impulse purchases may lead to overspending, which may affect how much money you have on hand for necessary expenses.

These are some common signs of overspending:

• Difficulty prioritizing expenses: Consider how you’re spending your money. In general, the biggest portion of your spending should be used to cover your basic living expenses. This may include saving for your short- and long-term financial goals, such as building your emergency fund or preparing for retirement. If last-minute decisions and impulse buys make up a greater portion of your spending than your essential expenses, this may indicate you're overspending.
• High credit utilization: Overspending may lead to using more money than you're receiving each month, often resulting in increased use of credit cards and more opportunity to go into debt. Having a high credit utilization ratio — which means using a large portion of your available credit — may indicate that you're overspending.
• Mindless or impulsive spending: Often, people overspending are simply not aware of how much money they are spending each month. Try making a list of items that you buy every month, and review that list against your spending. If you identify several purchases or subscriptions you forgot about, you could be unknowingly overspending.

Consequences of overspending

Left unchecked, overspending — like many bad financial habits — may have severe consequences. Spending too freely may result in a credit card balance you can’t pay in full at the end of the month, leading to ongoing debt that may be difficult to pay off due to high interest rates on many credit cards. A high account balance also has the potential to lower your credit score, which may make it more difficult to secure additional credit.

Overspending may also have personal and social consequences. Carrying debt may contribute to stress and anxiety, affecting your relationships and mental health. A low credit score may make it more difficult to work towards milestones, such as planning your dream wedding, buying a home with your loved one or saving for a child’s education.

How to rein in overspending

Consider these tools to help you evaluate your spending habits and stay on track to meet your financial goals.

Set specific, personal savings goals

While any amount of saving may help build financial security, it’s useful to create specific short-term and long-term financial goals for yourself. These might include saving for a down payment on a first home, building up your emergency fund or saving for your family’s future. These larger aspirations may lend a greater purpose to your weekly and monthly savings goals and provide motivation to continue saving your money.

Spend only what you can afford

Take an honest look at your income and how much you can feasibly afford to spend each month. In general, try to avoid going into debt on consumer purchases, such as home goods and entertainment items that aren't essential. When you do take on debt, for example, to purchase a home, pursue training or fund an education, calculate your debt-to-income ratio to help determine how much you can reasonably afford.

Organize expenses into categories and track them

Spending mindfully requires understanding your monthly expenses and learning how much of your spending goes to “needs” and how much to “wants.”

To begin organizing, look at your bank statements and think critically on each transaction to decide which expenses go into each category and if they are "needs" or "wants". You can also import your transactions into a budgeting software that will help sort your expenses into categories — for example, housing, entertainment, groceries, clothing and more. This will allow you to see where your money is going and help you identify areas where you can cut down on your spending.

Track weekly savings

In addition to tracking your expenses, also note how much money you’re saving on a weekly or monthly basis. Regular saving is important as it helps you build financial security that may protect you from debt.

Automate savings

Many financial institutions offer mobile apps and other tools to help streamline the basics of financial management; for example, setting up automatic transfers from your checking account to your savings account makes saving feel easier, since you won’t need to manually transfer over funds from each paycheck. A banking app may help you automate many essential budgeting tasks, freeing up your focus while you keep saving.

Make a budget for shopping trips and carry a shopping list

Shopping from a grocery list may help ensure you buy only what you need and keep you on the path to growing your savings. Planning ahead and buying ingredients for that week's meals may set you up for success and help remove the temptation for pricey takeout.

Keep cash on hand

Those who find themselves making impulse purchases — or have difficulty tracking their spending — may be better served paying with cash instead of a credit card. Keeping cash on hand may naturally limit your spending ability by ensuring you don't spend more than the cash you've taken out for the week.

How to save money and not spend it

Ultimately, using your money mindfully may be the key to avoiding overspending. No matter what your financial goals are or what your personal budget looks like, becoming conscious of where your money is going — and assessing how well that aligns with your longer-term goals — might help you cut down on the mindless spending or impulse purchases that often result in overspending.

If you’re struggling to set realistic goals, you’re not sure how to start budgeting or you simply want support and expertise in reaching your goals, consider consulting a financial professional. An expert can review your budget to help identify overspending, as well as offer realistic plans to help you save money more efficiently, from building a robust emergency fund to saving for the retirement of your dreams.