Why overspending is one of the biggest financial mistakes you can make

When it comes to financial mistakes, financial advisors see them all.

A key theme, overspending, tends to crop up, whether it’s on homes, college, or even fine jewelry.

For two clients, realizing how much they had spent on jewelry over the past 18 months — $1.4 million — was a shock, said Barry Glassman, a certified financial planner and founder and president of Glassman Wealth Services in Vienna, England. Virginia.

The following year, after meeting with Glassman, they reduced those expenses to about $8,800, mostly for jewelry repairs.

“When people see where their money is going, their behavior changes,” said Glassman, a member of CNBC’s Council of Financial Advisors..

The spending of ultra-high net worth clients is out of reach for most consumers. But the temptation to overspend can affect anyone, regardless of income.

“In the extreme, this is why most lottery winners go bankrupt,” Glassman said.

“They feel successful, they feel rich,” he said. “But they don’t realize the difference between wealth and income.”

Not all discretionary spending is negative, especially if it’s intentional and aligns with your goals, notes Preston Cherry, CFP, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin.

“There should be no social shame in spending to fund your well-being, present or future,” said Cherry, who is also a member of the CNBC FA Council.

But Glassman, Cherry and other consulting experts say there are some risks that can hurt your bottom line and jeopardize your ability to achieve other goals.

When it comes to splurging on big-ticket items, Louis Barajas, CFP, enrolled agent and CEO of International Private Wealth Advisors in Irvine, Calif., said he likes to visually show clients how their spending can interfere with their financial independence.

“It’s about mindset versus budget work,” said Barajas, a CNBC FA board member.

An expensive purchase, buying a home, can set people back if they take on too much house or too large a mortgage, notes CNBC FA Council member Cathy Curtis, CFP and founder and CEO of Curtis Financial Planning, an Oakland company. , a California-based fee-only financial planning and investment advisory firm for women.

A family Curtis worked with missed out on a few houses by bidding too low. To correct this, they took their real estate agent’s advice and made a high offer on the next house they found. Curtis’ spreadsheets and advice on what they could afford “went out the window,” she said.

The family’s house payment, combined with property taxes and insurance, puts them at risk of a cash flow crunch. They hit a low point when the husband lost his job, prompting the wife to spend her inheritance.

Taking such risks in real estate can be a gamble. Although homebuyers can increase their payments through salary increases, it doesn’t always work, Curtis said. The positive side is that most real estate tends to appreciate over time and can therefore be a good investment, she said.

When shopping for a home, it’s best to treat it as a business decision rather than a personal one, Curtis advised.

“Buying a home can be a very emotional experience,” Curtis said. “I advise clients to keep their emotions in check and know that there will always be another home that suits them better.”

Another big-ticket purchase, a college education, may also require controlling emotions, especially if a child’s dream school breaks the bank.

“Your kids can still borrow money for their college degrees, but you can’t borrow for retirement,” said Ted Jenkin, CNBC FA Council member, CFP and CEO and founder of oXYGen Financial, an investment banking firm. financial consulting and wealth management based in Atlanta.

Jenkin said he tells his clients to prioritize their retirement savings first and cut back on their college savings if they’re behind on that goal.

Small purchases can have a sneaky way of adding up over time.

When Glassman asks his clients to analyze their spending, many are shocked to see how their dining out habits add up. The same could apply to other categories, such as gifts or travel, he said.

“From there, 99 percent of the time, behavior changes,” Glassman said, motivated by the realization that small adjustments, like eating once a month or a week, can make a big difference.

Assessing how much is reasonable to spend is a lifelong effort, and often tricky in retirement.

Some retirees may overspend in their first retirement and be tempted to provide financial support to other family members, notes Ivory Johnson, CNBC FA Council member, CFP and founder of Delancey Wealth Management in Washington, DC.

“I’ve had to tell my clients to budget for their family because I understand the impact it will have on their retirement,” Johnson said.

Not everyone is susceptible to overspending.

For those who are more inclined to save, dipping into their nest egg can be uncomfortable once they retire.

“It’s difficult to transition from good saving and investing habits that lead to a secure retirement to spending on assets,” said a CNBC FA Council member. Blair duQuesnay, Chartered Financial Analyst and CFP, who is also an investment advisor at Ritholtz Wealth Management.

For investors who can afford to spend more, this may be a missed opportunity to enjoy the fruits of their labor, through gifts to family, travel or donations to causes close to their hearts, a- she declared.

Working with a financial advisor can help individuals evaluate whether their spending is too high, too low, or right. You can also do a gut check on yourself by assessing your mindfulness with your money, suggests Cherry.

“Intentional spending as part of a plan that invests in your well-being is perfectly acceptable,” Cherry said.