Why so many people overspend on their holidays

Collective blindspot

Many people return from holidays to higher-than-expected credit card bills. In the US, the overspend can represent a serious chunk of household income: 74% of Americans admitted falling into debt of more than $1,100 after returning from a holiday, according to a 2017 survey by personal finance website Learnvest.

In the UK, many travellers spend an average of £532 ($718) per person even before they’ve  left the country – on anything from duty-free shopping to trip-related clothing, according to research from the Association of British Travel Agents.

“I have worked with a lot of people who have no problems in their financial life – except on vacation,” says Brad Klontz, a psychologist and financial adviser in Hawaii who works with clients on spending.

Hard cash

So why do people lose control of their spending when travelling?

There are a host of subconscious reasons behind spending more on holiday and it’s difficult to keep them in check, says Klaus Wertenbroch, marketing professor at INSEAD business school’s Singapore campus.

For one, currency differences can trick you into feeling you have more money to spend when abroad, says Wertenbroch.

A 2007 paper he co-authored found that that the nominal (face) value of money affects how people perceive its real value: if you’re in a country where the face value of the foreign currency is a fraction of your home currency, you’re likely to spend more.

For example, if you’re travelling from Canada to Indonesia, your one Canadian dollar is worth roughly 10,800 rupiah. You’re more likely to overspend with a wallet stuffed with high-denomination bills, Wertenbroch says, because doing currency conversions on the fly is mentally taxing – you’re more likely to make a biased evaluation in favor of the face value, rather than the real value, of the price posted in the foreign currency.

‘Malleable mental accounting’

Travellers can be susceptible to setting unrealistic budgets that are either too low or too high because of so-called “malleable mental accounting,” which increases the tendency to spend, points out Shah. That’s because we are likely to justify our spending based on present circumstances rather than sticking to a strict budget to control spending.

For example, if you budgeted spending only $100 per day on holiday, you can spend another $30 on food by categorising food as an everyday purchase rather than strictly holiday spending. As a result, people justify that they can actually spend an extra $30 on food without recognising that they are already spending more than they do back home. “Your budgets are not as good as you think they are – things fall apart based on your motivations,” she says.

And conservative budgets don’t always work either, adds Shah. For example, setting aside $1,000 for a weeklong trip, realising you’ve allocated too much money to spend and still had $500 left over on the last day, makes it easier to splurge on the day prior to flying home, according to Shah’s research. “When you put together those rounded figures [via a budget], that creates a ‘licensing’ effect,” which provides a mental excuse to spend more money, she explains.

Feeling pressed for time in a now-or-never type of situation can also influence your spending, says Deepak Chhabra, an associate professor at Arizona State University who specialises in tourism.

Whether it’s finding a one-of-a-kind holiday souvenir or splurging on dinner, “you are viewing life from a short-term perspective and can get carried away,” says Chhabra. Where you’re from can affect how much time you have to spend on holiday – a 2016 study by travel site Expedia found those from the US, Japan and South Korea are less likely to use all their holiday leave than Europeans. Chhabra thinks those with less time per year for holidays could be more eager to take the plunge when it comes to spending.

Viewing friends’ trips via social media can inspire a sort of FOMO (fear of missing out) that can influence especially younger travellers to overspend because they tend to value experiences more than other generations, says Chhabra.

The pull of seeing acquaintances spend money on travel can often be a more powerful motivator to spend more while travelling than seeing an advertisement, she says. “You want to be on par with what [others] are doing,” she says.

So what should you do?

Rather than creating a budget based on what you’re planning to spend, treat your holiday like you would daily life, recommends Shah.

Get acquainted with the currency and how much items cost prior to the trip. Reading about transport, food and entertainment costs can make prices seem more familiar once you’re actually on the trip. Set up a daily – rather than a weekly – budget based on your research of how much you expect to pay for food, transport, activities and anything else you plan to purchase while traveling so it’s easier to track.

Finally, attempt to pay for the holiday within a short period of time; incurring flight and lodging expenses over a few months makes it easy to lose track of how much you’ll spend on each portion, adds Shah.

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