The psychology of spending

By Carol Yip
Saturday 24th July 2010

IN a perfect world, we would avoid too much debt and would never have to deal with the desperation of being unable to meet our debt obligations. But this isn’t a perfect world and, unfortunately, these distressing situations are the norm for many people.

According to the Credit Counselling and Debt Management Agency (AKPK), as at June 30, close to 126,292 people had sought AKPK’s free debt counselling services and, of that total, 45,336 had taken advantage of the agency’s Debt Management Programme (DMP).

Almost 38% of the DMP cases involve individuals whose annual salaries are below RM24,000, while another 32% earn salaries of between RM24,000 and RM36,000 a year.

The top reasons for default or difficulty in servicing the debts are high medical costs (26% of the cases), poor financial planning (25%) and lack of self-control when using personal credit cards (15%).

When the DMP cases are broken down by regions, Kuala Lumpur has by far the highest number of cases, with 56%. Johor Baru is second, but that’s under 13%.

Maybe people in Kuala Lumpur are not earning enough to enjoy their urban lifestyle, or the cost of living is a lot higher than those of other states. Or, simply, Kuala Lumpur has so many choices and fun attractions to spend our money on. One can only assume.

Our urban lifestyle needs and wants can be based on personal reasons and often are due to external factors and influences such as family, friends and advertising. Given the nature of these factors and influences, we often find it difficult to differentiate between the needs and wants that are created for us and those that we genuinely require. This has an impact on our spending decisions.

Regardless of gender, we all have some compulsion to spend. Studies show that people with self-esteem issues engage in more impulse spending, thus buying things they don’t really need. When “convenience” becomes an integral part of our urban lifestyle, almost like a “need” for us, we will spend money to enjoy convenience. We are willing to pay more for services like eating out, shopping at supermarkets or in-home maid services. The list goes on.

Studies also show that most people are much less likely to buy, or less willing to spend as much, when paying with cash as opposed to credit cards. This is because of the ease that card payment offers.

Also, using debit cards may not necessarily be wise if the person quickly depletes the savings account to which the debit card is linked.

And having the convenience of credit cards to pay for our needs and wants can compound our spending problems when our credit card limits are higher than our monthly salary.

Another problem is the lack of financial knowledge among the general population. Many do not fully realise the compounding effect of interest charges when credit card debts are not fully settled.

Unless we seek professional financial planning advice or attend financial education talks and briefings, such as the initiatives provided by AKPK, we may be forever stuck in the “debt trap.”

More importantly, if overspending is psychologically influenced, then we need to analyse the root causes of the overspending problem. How did you get too deeply into debt? Why did you keep charging items you couldn’t afford? Why did you feel the urge to use those little plastic cards for things that weren’t necessary, even when you began to struggle to make the payments? What causes your compulsive spending?

Spend time to find answers to these questions, and seek professional financial coaching or counselling, if necessary.

Have the determination to solve these problems and you will increase your chances of achieving debt-free status.

Carol Yip is a personal financial coach and also founder and CEO of Abacus for Money