Impulse spending is taking its toll

 Interesting reading with some ideas that may surprise you. We overspend, and make impulse buys that hurt our financial independence. If we know what we overspend on we can, I believe take steps to reign in our impulse spending and get control of our personal finances.

According to a BMO report released today, impulse spending is taking its toll on Canadian household balance sheets. The BMO Psychology of Spending report is the first in a series from BMO that will examine personal finance and investing behaviours among Canadians and the resulting effects.

The inaugural report on the spending habits of Canadians found the majority (59 per cent) make impulse purchases, with half (52 per cent) regretting the purchases after the fact, and 43 per cent sometimes spending more in a month than they earn.

The report, conducted by Pollara, also revealed:

• The majority of Canadians at least sometimes shop to cheer themselves up and buy something they may not need because it's on sale (60 per cent and 55 per cent respectively), and 42 per cent buy items they never use.
• On average, Canadians spend $310 a month on items they want but do not need, and believe they could save over two-thirds of this amount if they made an effort to limit their spending.
• The most common impulsive purchases made by Canadians over the past year are clothing (57 per cent), dining out (52 per cent), shoes (39 per cent), books/magazines (38 per cent), and music/movies (31 per cent).
• Additionally, one-in-five Canadians (19 per cent) have purchased consumer technology items on impulse in the past year.

"Financial anxiety is commonly triggered by larger one-time expenses, but spending on a daily basis can be the most disruptive when it comes to keeping your financial house in order over the long term," said Lily Capriotti, Vice President, BMO Bank of Montreal. "In most cases, impulse spending is an emotional transaction. Setting parameters and tracking your daily spending can help curb behaviours that can negatively affect the larger picture."

Ms. Capriotti noted there are a few practices Canadians can put in place to help track and control impulse spending, including setting aside savings on a regular basis, putting off impulse purchases for an hour, or using online tools to track daily spending and set limits. There are online personal financial management tool that enable you to set and track spending limits and savings goals.

"The data shows Canadians recognize they have the opportunity to save hundreds of dollars per month and thousands per year by cutting back on non-essential items," said Ms. Capriotti. "However, the report shows only one-in-five review non-essential purchases at the end of each month, which implies some may be avoiding the reality of how much of their money is being put towards things they do not need."

Ms. Capriotti added that leveraging a TFSA or a high-interest savings account, can help Canadians maximize these savings.

According to BMO Economics, Canadian household debt excluding mortgages has doubled in the past decade and consistently outrun disposable income, with the debt-to-income ratio rising from 42 per cent in early 2002 to a record high 153 per cent earlier this year.

The Consequences of Impulse Spending

• According to the report, one-third (31 per cent) of Canadians have had to borrow money or take out a loan to pay for non-essential items, with 23 per cent unable to buy something they needed because of their spending on items they wanted.
• These habits are more common among younger Canadians. One-in-three (33 per cent) of those under 30 have been unable to afford something they needed because of spending on 'wants'.
• Even high-income earners have felt the consequences of over-spending on non-essentials - 19 per cent of those in households earning at least $100,000 a year have been unable to afford something they needed because of non-essential purchases.

Demographically:

• On average, men spend twice as much as women on 'wants' ($414 vs. $207), and stand to save more by cutting back ($276 vs. $145).
• Top 5 Impulsive Purchases for Men: dining out (53 per cent), clothing (47 per cent), books/magazines (32 per cent), shoes (29 per cent), software/apps (26 per cent).
• Top 5 Impulsive Purchases for Women: clothing (66 per cent), dining out (50 per cent), shoes (48 per cent), books/magazines (44 per cent), makeup (36 per cent).

Spending Money You Don’t Have

The survey also found that 31 per cent of Canadians had to borrow money to pay for their impulse buys and 23 per cent said they were unable to get something they truly needed because of overspending on wants.

Zap Impulse Spending

If you find yourself splurging on more than you can truly afford, here are some ways to pull yourself away from the cash register:

• Wait. Really ponder if you need those new boots or if the family needs to go out for dinner tonight. Take an hour to think about it before pulling out that credit card.

• Spend what you have. Speaking of credit cards, if impulse buying is a real problem, consider doing all your spending with cash or using debit so you can never spend more than you have.

• Tuck money away. Keep a separate savings account (you can find a list of competitive rate accounts here) and create automatic transfers every month to be sure you’ve got money saved for your real needs. Tap into that account only when you need to replace your winter coat or do an urgent car repair.

• Shop at home. Before you head out to purchase new things or indulge in a nice meal, ponder the stuff you already have. Dig into the back of your closet for that great sweater you bought last year. See if you can’t make a gourmet meal with what you have in the fridge (and the help of an online recipe search). See which things you can repair around the house instead of buying a new replacement.

• Ignore the hype. Online sales. Commercials that tout a high lifestyle. Question the marketing you’re exposed to and ponder how you can find meaning in your life beyond your purchases.