Why curbing bad spending habits is better for your financial wellbeing than increasing income

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The past few years have been challenging for British households as the cost of living crisis and rising mortgage costs stretched our budgets. Fortunately, inflation has fallen in recent months and certain expenses, including energy bills, have come down.

This could mean that the pressure starts to ease and you find more room in your budget soon – you may have noticed a change already. However, the increased costs that you might have experienced in recent years highlighted the issue of financial wellbeing.

Regardless of your financial situation, you might assume that increasing your income is the key to finding financial happiness and preventing stress about your wealth. This may appear to make sense because if you have more money, it should be easier to afford your living expenses, enjoy luxuries, and contribute to your savings for the future.

Yet, Harvard professor Arthur Brooks argues that earning more money won’t necessarily improve your financial wellbeing. This is because increased income doesn’t address the underlying problems that cause financial stress in the first place.

Read on to learn more.

The average UK household had £2,471 in credit card debt in April 2024

Professor Brooks states that high levels of credit card debt are one of the biggest contributing factors to poor financial wellbeing. This is unsurprising as the Citizen’s Advice Bureau reports that 85% of people surveyed said debt had negatively affected their mental health.

According to the Money Charity, the average UK household had £2,471 in credit card debt in April 2024. This might suggest that many households don’t have enough income to meet their financial obligations, and this could affect their financial happiness.

As a result, you may believe that earning more would make it easier to cover your living expenses and reduce your reliance on borrowing, ultimately improving your financial wellbeing.

However, Brooks argues that this isn’t the case because many people borrow money to spend on non-essential items. Additionally, you may experience “lifestyle creep” when your income rises and this could prevent improvements in financial stability.

An increase in income could lead to “lifestyle creep”

“Lifestyle creep” describes how a person’s expenses rise alongside their income. This might happen if you improve the standard of goods you buy or spend more on luxuries.

For example, after your earnings rise you may start shopping at a more expensive supermarket, eating out more, or replace a perfectly functioning car.

If you continue with “wasteful” spending and succumb to lifestyle creep, after you’ve paid your monthly expenses, you won’t see a change in the disposable income you have left despite an increase in your earnings.

Additionally, if you’re spending on credit cards, you may continue borrowing at the same level because your outgoings rise in line with your income.

As a result, the additional income won’t have a measurable effect on your financial happiness or improve your ability to work towards long-term goals.

This is why Brooks believes that curbing your bad spending habits is the key to finding financial happiness. Otherwise, your spending may increase at the same rate as your income, meaning you never relieve the financial pressure, no matter how much you earn.

Curbing bad spending habits and avoiding lifestyle creep could help you work towards long-term goals

In some cases, households struggle to maintain financial stability because their expenses outweigh their earnings. As a result, they’re forced to rely on borrowing to purchase essentials and pay bills. People in this situation may see an improvement in financial happiness if their income rises because it’s easier to cover their essential costs.

Yet, you may face pressures because of poor spending habits. In this instance, increasing your income likely won’t improve your financial happiness.

Fortunately, if you can change your financial behaviours and reduce waste, you may find it easier to cover your monthly expenses. Consequently, you could be less likely to experience stress about your finances.

Better still, if you reduce your spending, you may have more disposable income each month. You could use this wealth to contribute to savings and investments for the future and work towards long-term financial goals.

Achieving these important life goals may bring more happiness to your life than short-term purchases.

Once you curb your bad spending habits in this way, any future increases to your income should have a greater effect on your financial wellbeing and your ability to work towards your goals.

3 simple ways to avoid bad spending habits

1. Create a detailed budget

A detailed budget is the foundation of positive spending habits. By listing your income and all your expenditures, you can clearly see whether you’re living within your means. Additionally, you might identify areas where you’re spending more than you need to.

By regularly reviewing and adjusting your budget, you can cut back on wasteful spending. Having a budget in place might also cause you to think twice about certain purchases. You may find that you forgo spending on certain items if it would mean exceeding your budget.

2. Question your purchases

Often, people overspend because they impulse buy items that they didn’t originally want or need. Questioning your purchases is a simple way to avoid this. Before buying something, stop and consider whether:

  • You genuinely need the item or if you simply want it
  • You can afford it without exceeding your budget or making sacrifices elsewhere
  • The purchase will improve your quality of life.

These three questions will give you perspective and, in many cases, you’ll find that the purchase isn’t worthwhile. Consequently, you can reduce impulse buying and save money.

3. Set long-term financial goals

Remembering why you’re trying to control your spending in the first place can give you the motivation you need to maintain positive behaviours. That’s why setting long-term financial goals can be very useful.

In situations when you would normally spend wastefully, you can focus on your goals and consider the bigger picture. As a result, it’s easier to avoid the temptation of short-term gratification because you know that reducing your spending now will lead to greater rewards in the future.

Following these simple steps to control your spending could help you improve your financial happiness.

Get in touch

We can help you review your spending and create a plan to work towards your long-term financial goals.

Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

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