Many people seem to feel their money vanishes almost as soon as they get paid. But of course, that’s not the case. They just aren’t spending their money wisely.
Being wise with your money means being thoughtful and accountable and helping it go further to get what you want. It’s about having a plan so you can spend as well as save money for a vacation, an emergency fund, or even start that business you’ve been dreaming about.
If you know how to be wise with money, it’s not all a matter of how much you make. It’s how you spend it and how you manage it so you can optimize your quality of life. Read on to learn:
• Why spending money wisely is important
• Habits that help you spend wisely
• Ways to track your finances
• How to know how much you can afford to spend.
Why Spending Wisely Is Important
A harsh truth is that not many people know how to spend money wisely. It’s not a skill you’re taught in school, and many families don’t feel comfortable discussing money openly. Which means many of us are in the dark when it comes to understanding how to budget and not overspend.
Plus, the world is full of shiny, enticing new things to buy, and the media tends to be splashed with images of people dining out, shopping nonstop, and jetting here and there. The idea of spending limits is too often absent.
But if you’re serious about learning about how to reach your financial goals and not having too much debt, you can adopt habits that will help. It’s not about living a life of deprivation at all. But spending money a little differently is probably on the agenda.
The transition into adulthood and managing one’s own money can require focus. Unlike the days when you lived with your parents, your income is not all disposable. You might have rent or a mortgage to pay, a car payment, a student loan payment, credit card debt, and more. It can be overwhelming and feel like you’ve taken on too much.
But when you start learning how to spend money correctly, you can get on top of your budget and your financial life. That’s a great feeling of accomplishment and independence. Plus, it sets you up for good money habits for years to come.
Now, read on to learn 10 ideas for how to spend your money wisely.
10 Tips for Wise Spending
1. Not Trying to Impress Others
When you buy something, check in with yourself and make sure it is something that is truly for you and not something you are buying because you feel you’re “supposed to,” “everyone is getting one.” or it will make you look “more important.” These purchases can wind up being very expensive and very disappointing.
Cars are a great example. There are many vehicles that may be adequate for your needs, but often, we buy pricey cars that look good to others, and we wind up living above our means. Sure, a fancy car is impressive. But being stuck with an unmanageable monthly payment is uncomfortable and adds a level of stress to your daily life. What’s more, if you default, it will likely hurt your credit score. So work towards buying just what you need, not status items.
2. Not Eating Out or Buying Coffee Every Day
Though small splurges every once in a while aren’t going to kill your budget, a regular habit of eating out or buying coffee can put a dent in your financial fitness. Everyday spending habits can make or break your budget. Perhaps it’s not coffee or eating out that is costing you; maybe it’s ordering things from Amazon all the time or picking up the tab too often when you and your best work buddy have a quick drink. All the small purchases you make add up over time. Remember, to blow $10,000 a year, you just need to spend $27 every day. Lots of little purchases can wind up undermining your plans to build financial health.
To make sure you’re spending wisely, be sure to have a budget for your splurges. It’ll feel good knowing you have a plan to spend on fun things while also putting money away in your bank account instead of eating it. If you’ve been getting a pricey takeout coffee most mornings as a treat en route to a busy workday, try taking that down to a Monday and Friday splurge for a while. Maybe you’ll then be comfortable reducing that further as you realize that taking a thermos of homemade java (your favorite blend) can be just fine.
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3. Setting Reminders for Bills to Avoid Late Fees
One of the least wise ways to spend money is on late fees, interest, and other costs that don’t contribute anything positive to your life. After all, you would probably much rather spend money on something you enjoy than on late fees.
To make sure your bills are getting paid on time, automate payments as much as possible and set reminders so you’re never late. Your credit score will thank you too.
4. Using a Journal of Transactions to Avoid Frivolous Spending
A journal of transactions can help keep you accountable to yourself about where your money goes. Truly, there’s nothing more eye-opening than seeing how much you’re really spending in a month. Reviewing your transactions can help you learn how to spend wisely.
For example, you might not realize you are as heavy a ride-share user as you are. You may think you only call an Uber “in emergencies” but then realize those emergencies are happening a couple of times a week. A journal can help you truly get a grip on overspending and dial it down.
5. Having a Monthly Budget
A monthly budget is nothing more than a plan for how you want to spend your money for the month. When you have a plan and a goal, you can train your brain to forgo things that are not important and save for things that really matter to you.
Which kind of monthly budget to set up depends very much on your personal preferences and needs. Some people love apps which automate the process and can show you how your money and spending break down in bar charts and the like. Others prefer using a spreadsheet or journal. Some find systems like the envelope method or 50/30/20 rule helpful. Do a bit of online research; you’ll likely spend more wisely once you find a system that suits you.
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6. Figuring Out What Habits Eat Up Your Budget
After you’ve tracked your expenses, it might be shocking to see where your money is going. You might have a few habits, such as shopping too often or splurging on gourmet dining, that take up more of your budget than you would like. Or you might have unwittingly signed up for quite a number of streaming services when you only really watch a couple of them. Perhaps your weekend brunches with friends have gotten more pricey than you ever realized.
By identifying what is burning through your money, you can then take steps to spend more wisely. Changing up a few of these habits can help you stretch your budget and spend your money wisely. You’ll probably open up some funds for savings, too.
7. Putting Money on Your Credit Card When You Can Afford to Pay It Off
You do not want to pay credit card interest. In 2022, the average credit card interest rate is close to 20%, making this one of the most expensive ways to finance a purchase. In a nutshell, you wind up paying a 20% surcharge if you buy things with plastic and don’t pay it off ASAP.
Paying interest on a credit card is paying for something that enriches the bank and does nothing for you. Using a credit card wisely can help boost your credit score, but “wisely” is the key word. You want to charge up no more than 10% (30% at most) of your credit limit to keep your credit utilization ratio low. And you want to pay the bill off ASAP.
8. Thinking About Long-Term Effects of Purchases
The average American spends $314 on impulse purchases each month, according to a recent poll. That’s nearly 4,000 after-tax dollars each year for unplanned purchases. If spending wisely is your goal, you should ask yourself: Wouldn’t that money be put to better use elsewhere, such as a vacation or an investment?
One trick to curb impulse spending is to acknowledge the emotional component. Some of us shop when we are feeling bored, angry, or sad. Purchasing some cool new gizmo or a great jacket can be a distraction and a mood booster. One way to short-circuit this emotional spending can be to imagine the item in your house and how it looks used a few years from now. If you can visualize its future (being out of style, faded, worn, or broken), you might not want to purchase it in the first place. Think of, say, a currently stylish pair of boots sitting at the back of your closet with other unworn impulse buys. That may help you realize that the item isn’t as vital as it feels when you are shopping.
You might also want to think about the long-term financial impact the purchase will have. If you, say, make a lot of impulses or splash out on a fully-loaded new car, these costs can either snowball due to interest or shadow your finances for years to come.
9. Tracking Your Finances Daily
Following your money closely can help you spend wisely. Not that you want to be a slave to dollars and cents, but there are fun ways you can keep track of your spending in today’s technology-rich world, including money-management apps. These can connect your bank accounts, credit cards, investment accounts, and more to give you a snapshot of your financial health.
If, say, you see that your credit card balance is climbing, you might decide to cook pasta versus ordering takeout that night. Or perhaps you notice that with a recent rent increase, you are struggling a bit to cover all your expenses. That trend might convince you to economize some of your spending or start a side hustle to bring in more cash.
10. Knowing How Much You Can Actually Spend
A key part of your budget should be knowing how much you can actually spend in a month, as well as how much you should save per month. It sounds obvious, but many people don’t do the math. Figuring out and then hitting those numbers is important when you are focusing on spending wisely.
While the average household spends over $5,111 each month, your number will likely be different as it is unique to your circumstances. It’s wise to look at your take-home pay and see how much the “musts” (food, shelter, health expenses, and anything else needed to survive) cost every month. Next, assess what debts need to be paid. Do you have student loans you are paying off? Credit card debt you are whittling down? Great; subtract that from your earnings, too.
Then, you don’t want to spend every penny of what’s left. It’s important to also dedicate some funds to saving, whether that means for a down payment for a home, for retirement, or for an emergency (or for all of those). Budgeting $25, $100, or more a month to savings goals can help you reach your money goals. You might have that amount automatically transferred on payday from your checking account to savings accounts, so you can help keep your cash safe vs. spent.
Managing Your Finances With SoFi
Spending wisely is a key step towards financial health. Often, we fall into shopping and splurging habits without realizing where our cash is going. By tracking your spending and starting some smart new habits, you can rein in spending without feeling deprived. Your money will start working harder for you, rather than your working harder just to preserve the status quo.
Another way to improve your financial wellness is to find a bank that helps your money grow faster, like SoFi. When you open an online bank account with direct deposit, you’ll pay none of the usual account fees (like minimum balance or monthly charges), and you’ll earn a competitive APY.
What is the smartest way to spend money?
The smartest way to spend money is to spend according to your means and your values. You want to understand how much you earn and want to save, whether for a vacation, new car, retirement, or something else. Then, your spending needs to fit that budget, including planned-for splurges. Otherwise, if you don’t have a handle on your money, you could wind up in debt.
How can I manage my money wisely?
If you’re looking to manage your money wisely, use the tools available to you. There are apps that help you track your money and budget, as well as journals and spreadsheets. Put some time into finding a system that suits your goals and lifestyle so it feels like an enjoyable, almost effortless process.
How do I start saving?
One of the best ways to start saving is to open a separate savings account and automate contributions into it. Have a certain amount transferred regularly from checking into savings. Leave that money alone to earn interest, and make it difficult to take the money out (you could forgo a debit card on the account if offered one, for example).
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SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
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