You may have the absolute best of intentions when it comes to saving money or at least reducing expenses, but then that quick takeout coffee turns into a daily habit of fancy macchiato floats, and that practical purchase of workout shoes leads to yet another clothing-related spending spree.
Although it’s natural to want to treat yourself after working hard, it can easily evolve into excessive spending. You may not even be aware you’re doing it until you’re drowning in credit card bills.
But how do you change your spending? This post will guide you through typical spending triggers and poor habits, along with ways to create a workable budget and tips on how to track your spending.
It also will list areas where it may make sense to review your spending, in ways both big and small, so you can identify where you may personally be wasting money or at least spending it in ways that don’t dovetail with your financial goals.
Defining Excessive Spending: Compare and Despair
But what actually is excessive spending? After all, what may be excessive for you may not necessarily be so for someone with a larger income or savings account.
On the other hand, you may have more wiggle room in your budget than many people you know—so comparing your situation to other people is rarely helpful.
Instead, it’s often better to determine what would be excessive spending for your unique financial situation.
Excessive Spending versus Financial Wellness
While your short-term goal may be to curb spending, the long-term goal could be to create and maintain financial wellness.
The Consumer Financial Protection Bureau describes financial wellness as:
• “[having] control over day-to-day and month-to-month finances”
• “[having] the capacity to absorb a financial shock”
• “[being] on track to meet his or her financial goals”
• “[having] the financial freedom to make the choices that allow one to enjoy life.”
Though specifics will vary, overall, financial wellness means financial security, along with freedom of choice. Note what it doesn’t specifically say: that you must earn a high income to experience financial wellness.
In reality, you can have a great income but not have security and/or freedom of choice; on the other hand, you could earn an average income (or even less!) yet enjoy financial security and freedom.
No matter your income, if you spend beyond your means, it will be challenging to achieve financial wellness. But how can you control overspending?
If you find yourself regularly spending money on things you don’t need, then it may help to identify the underlying triggers that are leading to your excessive spending. It can help to monitor your mood when you find yourself impulse shopping.
Are you feeling stressed? Anxious? Bored? Once you identify those triggering emotions, you can find other ways to confront the emotion, such as exercise, meditation, or spending time with friends.
You may find yourself spending more when you shop online, or at your favorite boutique, bookstore, or sporting goods store. If you find yourself more prone to excessive spending at a certain location, manage how often you go there or take a limited amount of cash with you, leaving your credit cards at home so you can’t load ’em up.
You may find that you spend more when you go shopping with certain friends. If so, it may make sense to suggest other activities that won’t cost as much money. This could mean going out for coffee or to see an entertaining movie at the matinee, instead of an expensive restaurant or show.
Identifying Poor Spending Habits
Identifying your triggers may help you to recognize and better manage any spending habits that are keeping you from otherwise reaching your financial goals. Poor spending habits could include:
Impulse buying is when you purchase something that you don’t need and it wasn’t even something you intended to buy.
Instead you saw it, wanted it, and bought it. This can happen if you get excited by the sheer experience of buying something, or you have FOMO spending.
Or you may even buy something if you think you’re saving money—seeing an item that’s marked down so much it feels like a real bargain. Again, impulse buying can also be an emotional response to stress or another trigger.
Paying Minimum Amounts
Credit cards often allow you to pay a small minimum payment on your outstanding balance, perhaps only one to three percent of what you owe in total.
If your budget or cash flow is tight, perhaps because of your spending habits, it can be tempting to just pay what’s owed this month. But, if you do that, you’ll likely be in debt longer and pay significantly more in interest.
You can use a credit card interest calculator to find out the specifics for your situation.
Note: When you pay more than the minimum amounts owed, this could improve your overall financial picture and perhaps even your credit score.
Before you make extra payments on loans (such as a personal loan), though, you may want to make sure your lender doesn’t charge a prepayment penalty, which is an extra fee for paying more than the regularly scheduled payment on a loan.
Living without a Budget
Perhaps you haven’t created a budget all or maybe you simply calculate your budget in your head. Neither is ideal, and a written budget is more effective than a mental one because, when you can look at the entire financial picture, you can more easily and thoroughly see where your money is going, as well as where you’d like it to go.
You might, for example, be paying far more in banking fees than you realize or are still paying for a subscription that you don’t use anymore.
Not Tracking Spending
If you don’t track your spending, you can miss out on a lot of opportunities, including:
• the chance to identify where you’re overspending
• the opportunity to improve what you financially measure
• inspiration to eliminate less important expenses
• the chance to free up cash to spend money on what you love
• the opportunity to build savings into your budget.
Not Just the Little Things
Although it makes sense to look for relatively smaller money saving strategies, like price comparing your cell phone plan or watching for sales on items you need at the grocery store, it’s also worth considering these three large money wasters.
In general, it’s recommended to buy a car rather than to lease one, and to keep the purchase price to less than 20 percent of your annual income.
Additionally, it can make good financial sense to keep your car for at least eight years or when you reach the mileage of 150,000 (whichever comes first), since that’s the average life of a new vehicle.
Typically, you don’t want to exceed 28 to 36 percent of your gross monthly income for your total mortgage payment. If you’re buying a home in a more expensive city, this may be an exception.
You can also save money by saving enough to make a 20 percent down payment on your home, which can allow you to avoid paying private mortgage insurance (PMI) as part of your monthly house payments.
Bad debt is generally defined as debt decreases in value once you purchase it (for example credit card debt). To help achieve financial wellness, consider paying down your bad debt as quickly as possible.
Extending the amount of time that you need to make payments on bad debt becomes very costly because of the interest you’re paying, and serves as a sign of unhealthy spending behaviors.
Steps for better budgeting include:
• Considering only your after-tax income, or net income, when creating a budget. It likely doesn’t do your budget any favors to include money that will go directly to the government in the form of taxes. If you believe you’ll get a tax refund, it’s good to consider how you’ll use the funds, but it’s recommended that you don’t spend it until you have it in hand.
• Carefully tracking your spending, including your mortgage or rent, utilities and insurance, credit card payments, and groceries. This also includes smaller purchases that you might not even think about, such as the snack you buy when filling your car up with gas. The more precisely you record amounts, the more accurate your budget will be.
• Setting financial goals, perhaps to save for a down payment on your dream home or for a nest egg that will give you more financial freedom in the future. You may want to open an account for that purpose; as your account grows, you’ll gain motivation and enjoy the momentum.
• Seeing where you can cut back on expenses, which could include adjusting your thermostat or cutting out cable. You could even turn this expense reduction into a game.
• Being especially careful when you’re using credit cards or making mobile payments. They’re convenient, no doubt, and may provide you with reward points, but it’s easier to spend more that way, including on impulse purchases.
• Getting into the habit of putting a percentage of your money into your savings account, starting with the creation of an emergency fund.
Consistency pays off. If you pay attention to improving your budget every day, including but not limited to watching carefully for the reappearance of any excessive spending habits, it may make it much easier to reach your financial goals and attain a state of financial wellness.
Although much of this post is focused on how to cut back on expenses and rein in excessive spending habits, that’s only half of the financial wellness equation. The other side involves saving—beginning with an emergency fund.
How much you keep in your emergency fund depends on your specific financial situation but, at a minimum, consider having one month’s worth of expenses plus a financial buffer against unexpected expenses and/or to cover those that don’t occur monthly.
This fund is your first line of defense if you’re laid off from work, for example, or have an unexpected, urgent repair you need to address. Without this fund, you may need to rely upon high-interest credit cards to cover expenses. You might want to have as much as six months’ worth of typical expenses in your emergency fund as an even stronger buffer.
As far as saving beyond your emergency fund, it makes sense to list your financial needs and goals and then determine how much each will cost you. Then, work towards funding your short-term goals in a liquid fund where you can easily make withdrawals. For goals that are mid- to long-term, it may make sense to invest those dollars.
Track Your Spending With SoFi Money
One of the challenges with budgeting and overall financial wellness is keeping track of your spending. SoFi Money® can help. SoFi Money is a cash management account where you can spend, save, and earn all in one place.
The app makes it simple to see where you stand, including what you’re spending—helping you hit your financial goals. You can keep track of your cash flow and find ways to save, all in real time.
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