Most people underestimate their expenses, and then overspend.

Most people underestimate their expenses, and then overspend.

Inflation’s effect has led to increasing prices. Higher prices have further strained people’s budgets because there is usually a gap between what people think they spend and what they actually spend. Credit-card balances are increasing on average. The average household credit card balance is almost $10,000. The average credit card interest rate is about 20%. Increased credit card debt can indicate people are spending more money than they think. However, it is not always possible to spend less when everything costs more money.

Compounding is interest earned on earnest. While this is a powerful force for good for investors, it can lead to debt spiraling out of control.

Part of the reason people are underestimating how much they will spend in the future is that they are basing their forecast on current or historical expenses. Also, people typically consider regular expenses like gas and groceries instead of atypical expenses like the car breaking down or the roof leaking.

To take control of your budget, become aware of how much you are really spending. Keep track of how much you spend in one-off expenses each month such as medical bills or repairs. Also, include a buffer to account of inflation, say 5% of your budget or expenses. You would be surprised at how much money you are really spending in reality. Once you know how much that is, you can start to spend more wisely.