January often brings a deluge of ideas about how we can improve ourselves, our lives, and our finances. But just like resolutions and exercise plans, the work of changing your spending habits is done in the remaining eleven months of the year.
I saved my budget blog for February, when the glow of the New Year has worn off and we are starting to fall back into old patterns. Understanding your spending is the key to success for all financial plans, and the starting place for each of the plans we design. If we don’t know how much spending the plan needs to support, the plan is useless. But we also know from two decades of experience that most people underestimate their expenses considerably. (An ER doctor friend of mine has the same challenge when he asks his patients how many alcoholic beverages they drink each week.) Sometimes we just don’t want to come to grips with our true behavior. That’s ok – that just makes us abundantly human. But that does not mean that you can ignore your budget.
We also know that most people say they “want to budget” but they don’t really want to budget. What they actually want is for their current budget to work. Need an easy assessment about whether your budget works? If you have credit card debt, or savings of less than 3 months of your expenses, or ongoing stress about whether you’ll have enough money, your budget doesn’t work. If your income will remain relatively constant and your budget doesn’t work, it’s time to figure out your expenses.
Knowing that most people don’t like to budget and therefore most people don’t budget very consistently, I am going to suggest three methods. Consider it your very own Budget Choose Your Own Adventure thriller.
Cursory glance. It might be interesting to know where the money is going, but you are not committed to changes. Yet.
Most credit cards provide an annual summary of your spending. Look at it. Talk to your family about whether the big chunks of money are where you want big chunks of money going. You can take it one step further by downloading your transactions to an Excel spreadsheet (if you don’t know how to do this, your 7thgrader does) and grouping your transactions to see exactly how much money you spent on eating out, pedicures, travel, etc. The biggest culprit in most households is accidental spending. You can read my blog about how keeping up with the Joneses in today’s world is an endless and, oftentimes, losing battle.
Once you have learned about your spending habits, identify where money is “leaking” out of your budget and intentionally make some subtle changes so you spend where you mean to.
Really interested, and ready to change. You know you are not spending well, and you are ready to make changes but don’t know where to start. You are committed to budgeting.
Create your budget, and plan to follow it closely for 3 months with a plan to make a change based on what you learn. The goal is to see patterns, find spending habits, and identify where you can change some things. Track something you know you spend too much on. Need an idea? Start with eating out. Almost everyone can reduce that number. If you need a simple tool to create a budget, you can use this calculator on our website.
There are plenty of other online tools and platforms that allow you to track your spending vs. your budget. We use a tool in our financial planning process with our clients, and it is always eye-opening for our users. (If you decide to track your spending online, commit to doing it daily or weekly, and make sure you understand what the platform does with your data before linking your accounts.)
Once you identify where you can reduce or redirect your spending, do it. Fewer meals out might allow you to go on a weekend stress-relieving trip. You need to intentionally put a plan in place to make the change come to life, and then be proud of your work when you do.
Hard core. You are stressed by your budget and need to make changes now. You have tried before, but you have not made much progress.
While this may be logistically difficult, your challenge is to use cash or checks for all purchases for thirty days, with no credit card charges. Have a tactile experience with all discretionary spending. Pull the dollars out of your wallet. Write the number of dollars you are spending on the check. (Note to millennials: yes, I know you don’t have a checkbook.) Track each dollar. Make a value judgment on every purchasing decision. You will be exhausted, but well-informed. If you’ve ever committed to the Whole 30 eating plan, this method may be for you.
My MONEY budget can be helpful as a framework for you to consider how to look at the role that money plays in your life and how to make decisions around it:
After this process, you should have a very specific relationship with your money and how it affects your life. Use this understanding to make choices throughout the year, and make sure that you carry those choices forward when you return to digital payments. Remember that money should enhance your life, not create stress in your life.
And if you can’t commit to any of this, here are some other ideas:
Review your credit card bill with someone when you pay it. Ideally this would be someone you are financially responsible with or for, such as your spouse or children. Yes, I am suggesting you talk to your kids about how you spend money.
Start talking to your friends about how they spend their money. I am completely fascinated with how people use their money to have the lives they want, so oftentimes I find myself in discussions about this topic with my GenX peers. Learn from others about how good and bad money choices affect their family, their goals, and their stress level.
Ask older family and friends about the choices they made when raising their families. They were likely raised with the idea that consumer debt is not an option, financial choices are important, and that “you can’t always get what you want, but if you try sometimes, you just might find, you get what you need.” In my opinion, it was a better mindset than what we usually see today.
Examining your spending should reveal some truths about whether you are using your money to have the life you want, as it does for me and my family each year. Happy budgeting.
Have feedback or questions? Ready to work on your financial plan? Let us know at firstname.lastname@example.org