At some point in our lives I think we ask this question. Where did all of our money go? What in the world could we have spent it on? We should have plenty left over at the end of the month!
Discovering the root of overspending can be a difficult endeavor. After all, we're busy people with busy lives – do we really have time to discover where we have overspent?
I argue that we don't have time to NOT figure out where our money is going. If we can't keep control over our spending, it won't matter how much money we make – we're just going to waste it all! To avoid this waste, here are a few ideas on how you can discover the areas where you are overspending and do something to change the behavior.
3 Steps to Destroy Overspending
- Collect the data! If you want to know where you're overspending, you're going to have to gather up some receipts. But we're busy people! Do we really have time for all of that? Here's what you can do: (1) Get a tissue box and empty it out. (2) Starting at the beginning of next month, spend like you have been, but collect up your receipts and put them into this box every night. If you don't have a receipt from a vendor, write the down information about the transaction (date of purchase, amount, vendor name, and items bought) on a Post-It note and toss it into the box. Don't forget to include any automatic payments from your checking account! (3) At the end of a full month of collecting receipts, dump out the receipts on the floor and start making piles. These are your budgeting categories.
- Analyze the data! Once you have your piles of receipts, add them all up and find out how much you spend in each category. Write each category down on a notecard and write down the total expenditures on one more notecard. Looking through all of your notecards, are there areas that you think you can cut back in? Try organizing your notecards by mandatory and discretionary expenditures. Then, look through your discretionary expenditures and see where you can cut back. Perhaps some of your mandatory expenditures aren't really “mandatory!”
- Take action! Now comes the fun part. Decide how much you're going to spend in each category – but be reasonable. If you're not sure how much money to cut back, try reducing by 10% and see how that works for the next month. Another great tip is to spend this month's income next month. Make sure you're spending less than you make though, and put the rest towards larger goals – like paying off debt and building an emergency fund.
Keep in mind that looking at one month's worth of expenditures is just a start. To have a solid working budget, you're going to have to modify it month to month as you learn how much you have to spend. Don't forget that emergencies happen. There are a few times throughout the year that you'll have to spend more that your spending budget will allow. Take this money from your emergency fund and calculate your emergency fund expenditures at the end of the year. This will give you a more accurate representation of how much money you should be saving.
Modify How You Spend Money
HOW you spend your money is important as well. You'll spend more money by using methods at the top of this list, and less money by using methods at the bottom.
- Credit Cards: Using other people's money pushes people to spend more. I've seen this in my own life and other people's lives as well. The ability to postpone payment encourages spending more money than if you had to use your actual hard-earned money.
- Debit Cards: Easy to slide through the vendor's machine, debit cards can promote quicker spending without thinking. However, because debit cards are linked to bank accounts, they produce more of a feeling of loss than credit cards.
- Checks: You write 'em, you give 'em. There's a heavier psychological impact when spending money with checks because you actually GIVE THE VENDOR SOMETHING PHYSICAL! Credit cards and debit cards are don't have this effect.
- Cash: The ultimate pain to hand over. You're going to spend less when all you have to spend within a certain budgeting category is cash. When you see cash leaving your hand, it's very painful! You might have a wow-I-just-spent-actual-money moment.
Now you have the tools you need to make your money behave! Track your spending, analyze the results, and take action! Keep in mind HOW you're spending your money, and you'll be on the road to saving more than you can imagine.
So, where's all your money going? Taking control of your spending will reduce stress, lower risk, help you to invest, and allow you to give like never before. You in?