“Retail therapy” is fun. I admit. But, where is the line? How do you know if your spending doesn’t justify the financial burden?
Women spend countless hours of invisible work, devoted to their family. While family can bring joy and fulfillment, it can also cause frustration and stress. Maybe this is why women tend to seek comfort in the process of shopping. This is why you can occasionally find me perusing ebay late at night for good deals on Kate Spade and Mackage. I spend all day caring for other people, I crave a moment to focus (and dote) on myself.
Or, perhaps the root of compulsive spending lies in insecurity. We all want to look as good as the other moms on the playground, right?
Those are just guesses why people tend to overspend. However, I can tell you with certainty of the financial indicators of when overspending becomes a problem for you and your family.
Critical Question: Are You Paying Cash?
If you are shopping with your extra money, that’s not necessarily a problem. Although, I would prefer that you put a portion of that extra money towards your retirement accounts, at least your spending isn’t putting you in debt.
However, if you are charging your treasures to a credit card, or not paying it off each month, that is a sign that there is a problem.
9 Signs that you are addicted to spending money
This list is interpreted from Fred Waddell’s book, Solution Focused Financial Counseling from Genesis Press.
- You regularly spend more money that you should. It feels out of your control
- You hide some (or most) of your purchases from your spouse
- You don’t use some (or most) of your purchases
- You spending habits often cause terrible repercussions (for example, fights with your spouse, late payments, missing appointments or family events)
- The repercussions from #2 don’t stop you from shopping
- But, you wish you could stop
- You think (all the time) about limiting your shopping
- It’s really stressing you out
- The stress is making you moody
Do you have an addiction?
According to Fred Waddell’s book, Solution Focused Financial Counseling (Chapter 14), you are addicted to shopping if that is how you deal with stress. It is also is how you feel better about yourself.
Why your house, car, and “toys” matter
It’s not just trips to the mall or your Amazon purchases that we are talking about. It’s also bigger ticket purchases. Actually, your house, car, and “toys” may cause a financial problem than your shopaholic personality.
What kind of car do you drive?
How expensive is your house?
Did you purchase a timeshare in Mexico?
Do you have a jet ski, boat, RV, or ATV?
Your new car, big house, vacation home and fleet of motorcycles are all wonderful things. Nothing about these assets are bad. I love beautiful homes, cars, and clothes.
However, from the financial planning perspective, it’s important to make sure you can afford what you are buying. Nobody wants to hear the question: are you living beyond your means?
Yet, if you are stressed out over money, which one is worse?
As your money coach, I encourage you to dial back the luxury on your home, car, and toys to a level that you can afford.
How to determine if you can afford it
- DO NOT ask this question to the lender, if you are financing a purchase
- Look at your budget, debt to asset ratio, debt to equity ratio, and debt to income ratio
- Work with a financial planner if you need help with #2
This is a great article by Ramit Sethi that teaches you about the importance of financial ratios (debt to asset ratio, debt to equity ratio, debt to income, etc). I highly recommend his blog, by the way (I will teach you to be rich!). If you utilize these ratios, you can indeed become as rich as you want.
Let’s take a look why financial ratios are my top recommendation.
The debt to income ratio formula looks like this:
$ amount of your total monthly debt payments
÷ $ amount of your gross monthly income
= Debt to income ratio
Check out this explanation, by Ramit Sethi, of how to use the debt to income ratio to determine how much you can afford.
The lower the number is, the better. According to Wells Fargo, the ideal debt to income ratio is 35% and below. That said, most lenders will provide you a loan up to 43-45%.
So if your debt to income ratio amounted to 16% like in the example above, you’d be in good shape for a home loan.
Do the math to figure out your debt to income ratio. If yours is above 35%, don’t take the next loan. Focus on paying down the loans your currently have. Or, sell the RV. Or, downsize your house. The root of your money stress is coming from the fact that you have too much debt.
15 Signs you can’t afford your house, car, and lifestyle
If you earn enough money, then it’s not a big deal that you are spending so much. I’d prefer that you invest a portion of it, but at least you can afford your shopping habit.
The fundamental question is: how much of your stuff are you financing? If you are taking out too much debt, it is causing you serious problems.
Debtor’s Anonymous published these 15 questions as a way to identify if you have a problem:
- Are your debts making your home life unhappy?
- Does the pressure of your debts distract you from your daily work?
- Are your debts affecting your reputation?
- Do your debts cause you to think less of yourself?
- Have you ever given false information in order to obtain credit?
- Have you ever made unrealistic promises to your creditors?
- Does the pressure of your debts make you careless of the welfare of your family?
- Do you ever fear that your employer, family or friends will learn the extent of your total indebtedness?
- When faced with a difficult financial situation, does the prospect of borrowing give you an inordinate feeling of relief?
- Does the pressure of your debts cause you to have difficulty sleeping?
- Has the pressure of your debts ever caused you to consider getting drunk?
- Have you ever borrowed money without giving adequate consideration to the rate of interest you are required to pay?
- Do you usually expect a negative response when you are subject to a credit investigation?
- Have you ever developed a strict regimen for paying off your debts, only to break it under pressure?
- Do you justify your debts by telling yourself that you are superior to the “other” people, and when you get your “break” you’ll be out of debt overnight?
Debtor’s Anonymous says If you answered yes to eight or more of these questions, you have a problem. They call it “compulsive debting.”
While it doesn’t appear to be as serious as other bad habits, such as being compulsive use of methamphetamines, compulsive debting is unhealthy for your stress-level, your family, and your future financial security.
Money is the leading cause of divorce. I suspect that compulsive spending initiates the problem, and compulsive debting drives the nail in the coffin.
An excellent solution for the compulsive spender or debtor
If this is resonating with you, you may have an addictive personality. I know I do. The trick for me was to channel my addiction into a healthier habit.
This gem of a short article on hicharlie.com gives an action plan for overspender.
Dave Ramsey’s “7 Baby-Steps” method for spending-control and debt management is also excellent. He has taught many people how to reign in their spending, and get obsessed with paying off their debt. Others accuse them of going “too far,” but I applaud them in their mission to improve their personal finances.