How a Few Hundreds in Overspending Can Lead to $14.1 Trillion in Debt

Last quarter, we saw debt reach new heights, yet again. The Federal Reserve Bank of New York’s Quarterly Report stated, “total household debt increased by $193 billion, or 1.4 percent, to reach $14.15 trillion in the fourth quarter of 2019. This makes the total household debt $1.5 trillion higher...than the pre-recession peak of $12.68 trillion, set in the third quarter of 2008.”1 Although there are many factors contributing to these numbers, from mortgages and car loans to student debt, it’s troubling to see a consistent increase quarter after quarter.

This got us thinking, what are some of the reasons, on a micro-level, that might be contributing to this massive debt? And where exactly are people overspending?

To answer our question, we conducted an analysis from our database for a better and more precise understanding of where Americans overspend. And in the spirit of college basketball tournament season, we've shared our results in a tournament-style bracket.

Using MX data, we gathered the average spending in each category per month, along with the average budget set for each category per month. We then took the difference between the budget and the actual spending to find the dollar amount of overspend per budget. The category with the higher dollar amount of overspend was the category that won the matchup.

The Four Places People Overspend the Most

Let’s be honest, it’s easy to overspend. A few dollars here, a few dollars there, and all the sudden we’re over budget. Our research findings show that the most common places people overspend is on vacations, because who keeps track of anything on vacation, anyway? On average, people go over budget by 62% in this category. Another area that has overages with an average of 82% is medical visits. Followed by furnishings at 45% and amusement at 33%. With those percentages and thinking about your own budgets, you could imagine how the dollars would add up. According to our research, the average for overspending on each category overall is a surprising 64.7%. Perhaps the most revealing thing that these findings show is that the top areas for overspending, with exception to medical bills, are avoidable, or can be planned.

How to Stick to a Budget

Budgeting makes it easier to prepare for unforeseen events and unexpected expenses. Today, “the typical American spends 61.3% of their annual income on [housing, transportation, and food].”2 And according to a recent Pew survey, “55% of U.S. households spend everything—or more than—they make most months, and many have little or no savings to deal with financial shocks.”2 But despite how important creating a budget seems to be, only “one in three Americans prepare a detailed written or computerized household budget each month that tracks their income and expenses—a large majority do not.”3

So why is it so hard to start and keep to a budget? It’s likely because traditional methods of budgeting simply take too much time and effort. Add that to the hectic day-to-day of most people’s lives, and it’s clear to see why it’s easy to lose track of where your money’s going. And when it comes down to it, some people fall short simply because they haven't been given the tools to succeed.

Fortunately, with the use of technology, financial institutions are well positioned to help their customers spend smarter and stay on top of their finances without having to actively update their budgets. Technology is redefining what it means to budget and how it’s done—making it so everyone can create better financial habits and stick to them.

How MX can help

To help put people’s lives on the path to greater financial wellness, MX has created Pulse—a completely self-guided financial wellness tool that financial institutions can use to empower their customers. With guided financial advice and AI-driven personalized insights, financial institutions can help their customers make better decisions in real-time, building financial strength and increasing their engagement. Pulse uses the exactness and precision of machine learning to create insights personalized by an individual's transaction history.

We’re ushering a new age of personal financial wellness with a tool that does all the heavy lifting—from proactive notifications to guided financial advice, so everyone has access to the financial information they need to lead happier and healthier financial lives. Pulse helps people effectively stay on top of their finances across every category, so they can plan smarter, avoid the stress of unexpected expenses, and achieve long-term goals and financial milestones.

1 https://www.newyorkfed.org/microeconomics/hhdc/

2 https://www.pewtrusts.org/en/research-and-analysis/articles/2016/04/28/innovative-policies-and-products-can-help-americans-save-more-build-financial-security/

3 https://news.gallup.com/poll/162872/one-three-americans-prepare-detailed-household-budget.aspx/