How to Take Control of Your Spending in 2020
Consumer debt has reached new heights, surpassing what created the 2008 recession. In the third quarter of 2019, U.S. household debt reached $14 trillion, which is a massive jump from the $13 trillion consumer debt in 2008.
With 2020 just getting started, isn’t it a good time for consumers to take control of their finances? A new year means people are in the perfect spot to transform the way they spend money.
Don’t you want to prevent or get out of debt? Most people typically do, and they have the power to do it. So, what’s stopping them from controlling their finances and staying out of debt?
Why do so many consumers struggle to control their spending habits?
These days, there is a focus on consuming more. Portion sizes are a great analogy.
According to a study published on Business Insider, the average portion size that restaurants, fast-food chains, and grocery stores offer has grown by 138% since the 1970s. As a result, people are consuming more food without even realizing it, and the same can be said for consumers’ spending habits.
With fewer barriers to prevent overconsumption, people can easily spend money, leading to mindless purchases instead of mindful ones that are necessary. This behavior, however, is not solely the consumers’ fault. There are economic incentives in place that actually entice people to spend more money than they probably should.
Economic incentives that encourage consumers to spend more
Companies know how consumers’ minds work, and they are excellent at figuring out the best ways to increase consumer spending. In fact, there are three main economic incentives that brands use to entice consumers to spend more money.
1. A rewards credit card
A rewards credit card is a great example of an economic incentive that encourages more — and often unnecessary — spending. For example, many credit card companies offer points that consumers can only earn by making purchases using their credit cards. Some brands even provide bonuses: spend a few thousand dollars by a specific time and receive tens of thousands of points in return!
It sounds like an incredible benefit, but in actuality, consumers should look deeper before obtaining a rewards credit card. For many people, the thousands of dollars they would spend for points could be budgeted for other things. But it’s hard for consumers to keep that in mind when there’s a prize at the end of their purchase. Haven’t you ever been excited to get a rewards card just to accrue more points?
Consumers use a rewards credit card for unnecessary items simply to meet the spending criteria that will unlock more points. This behavior doesn’t make a rewards credit card terrible. Points are a great perk, but many people put themselves under large amounts of financial stress and increase their debt at the same time.
2. Scarcity incentive
The scarcity incentive is a simple one: Humans place a higher value on products when the quantity or availability of those products appears limited. For humans’ prehistoric ancestors, this behavior referred to resources like food.
These days, however, brands use the scarcity incentive for non-essential items to help encourage consumer spending. For example, it’s not hard to find a website that shows consumers the number of products in stock, or how many other people have that same item in their cart, to increase urgency and motivate consumers to purchase. Even if someone prefers to wait to make a buying decision, the website nudges them to buy now. The only problem is if the consumer has not budgeted for that item, he or she will likely increase their debt with that purchase.
3. Instant gratification incentive
Consumers can access nearly anything from their phones or other electronic devices. The traditional “heading to the store” is becoming less and less common, with more consumers opting to shop online for everything from clothes, to books, to groceries, and more.
This instant gratification, while making consumers’ lives much more convenient, also has a downside: excessive spending. Because it is so easy to buy anything with a simple click, many consumers are starting to spend beyond their means.
This behavior leads to more consumers who need payday advances and payday loans, which then adds to their debt and financial burden. With so many different factors working against them, what can people do to decrease their debt and exercise control over their spending habits? Virtual cards may offer a vital solution.
How can virtual cards help individuals control their spending to decrease debt?
In a world where so many things can be done online, virtual cards can help those who want to control their spending. How do virtual cards achieve this? The answer is simple: spending limits.
With a virtual card like Privacy, consumers can set a limit on how much they spend with different retailers, streaming services, and online merchants. This feature can help prevent online shoppers from overconsuming because the limit forces them to stop after a certain point. This benefit also reduces unnecessary purchases and impulse buying because consumers know they only have a finite amount to spend with a particular merchant.
If consumers want to spend more, of course, Privacy allows them to increase their spending limit, but that adds another step for consumers, as they have to go into their account and raise it themselves. This small step slightly increases the friction throughout the buyer’s journey, which is often enough for an individual to second-guess their decision to spend more money and decide to stick to their budget.
How can spending limits help consumers control their finances?
Spending limits offer the obvious benefit: They limit how much a consumer can spend, thus preventing the consumer from spending more than they need. But spending limits can also provide other uses.
1. Subscription raises
Most consumers have one or more monthly subscription, which is typically set to auto-deduct payment from their accounts. Sometimes, when merchants increase the subscription’s costs, consumers don’t notice until the amount shows up on their statement.
By setting a spending limit, however, consumers can ensure a merchant doesn’t overcharge them if their increased price exceeds the limit they’ve set. This feature allows people to decide whether they want to continue with a subscription and pay the increased fee (which means they’ll need to increase their spending limit for that merchant) or cancel their subscription altogether.
2. Canceling subscriptions
Many consumers subscribe to various services and intend on canceling those services but forget to follow through. This behavior leads to unnecessary charges, which are usually non-refundable. But by setting a spending limit, the subscription fee is declined depending on the amount the consumer set. Even if a person forgets to cancel a subscription, they won’t be charged thanks to their spending limit.
3. Added protection from data breaches
Some Privacy users say their spending limits have saved them from data breaches. There have been times when Privacy users set a spending limit, reached that limit, then noticed many declined transactions from the retailer. Of course, Privacy users stopped the unapproved charges from going through because of their spend limits, but they also realized a critical insight as well: the merchant was hacked. In some cases, consumers alerted merchants about the breach before the retailer even knew.
Decrease debt by reducing overconsumption
It is all too easy for consumers to fall into the overspending trap. They can buy something with the click of a button, which can lead to unnecessary purchases and impulse buying.
But using virtual cards and setting spending limits can help consumers add another layer to their budget to encourage them to control their spending. With useful tools in place, individuals can start to decrease their debt and gain the financial freedom they seek, which will all help reduce the U.S. consumer debt.
What are your financial goals for 2020? Follow us on Twitter (@PrivacyHQ) and share them with us, and let us know what you’re doing to achieve them.