By Team Wall Street Survivor
The chilly scene currently frosting up your window notwithstanding, now is always a good time to take stock of your “spending hot spots.” The theory is that identifying those areas of financial vulnerability — the products and services upon which you have demonstrated a proclivity for spending the most money — is the first step to addressing them.
Here’s some help.
The critical launch point requires you to review your bankand credit card statements and receipts to track where your money went. Gather several months’ worth of the things, and use different colored highlighters to suss out patterns. Eventually, you’ll be able to isolate the categories that characterize your spending.
Ideally, you’ll not only be able to identify your groupings, but to rank them, too, from biggest culprit on down. This will help you focus your cost-cutting efforts.
The 50/30/20 rule
Before tackling your specifics, look to implement the 50/30/20 method. This rule takes some of the hard-core challenges out of the ugly task of budgeting by providing a compassionate set of guidelines to it.
Here, your needs are allotted 50 percent of your after-tax expenditures. These are essentials, like your rent, utility bills, food, medications, minimum credit card payments and transportation costs.
Cap your wants, meanwhile, at 30 percent. This venture into more discretionary spending encompasses those small pleasures that enhance your life, such as movies, concerts, cable and nights out at the pub. Obviously a person’s “wants” list could trail on endlessly (who doesn’t want a month in Tahiti?); inside this guideline, you must hold its ceiling at 30 percent.
The 20 percent in this directive requires individuals to devote at least 20 percent of their after-tax income to their financial goals. Here, you pay down (more than the minimum requirement of) your debt, bulk up your savings, add to your retirement stash, finally launch an emergency account or maybe start a house fund.
If it helps, set up three accounts (or label three mason jars) according to the 50/30/20 algorithm.
The Standard Categories
Conventionally, the biggest spending classifications are as follows: home and living; food; entertainment, celebrations and vacations; and beauty and style. Yours might differ, however, and you need to be honest with yourself about what your biggest weaknesses are. If you’re a particularly avid collector of electronic gadgets, for example, or are such a fan of your pooch you can’t help but lavish her with expensive accouterments, take note.
Home and Living
This is likely the spending category with the biggest appetite of all. Here, your budget groans with expenses like rent and mortgage, utilities, home furnishings, home maintenance, banking fees and transportation costs.
If you spend more than 35 percent of your net income on your accommodation and costs associated with maintaining it, you’re spending too much. Consider cutting here by taking on a boarder, refinancing your mortgage or moving to cheaper digs. If none of these is an option, you’ll have to slash elsewhere.
This is likely your single biggestvariable expense. Take care to include not just groceries in this bucket, but all the money you spend eating and drinking outside of the home. That means coffees, snacks, gum runs and every last of your restaurant meals.
There’s a fair bit of room for movement in this arena, though the sting of associated deprivation can be rough. Cutting down on just two store-bought coffees a week, for example, could score you more than $400 a year in savings. Bringing your lunch one more day than you typically do, or suggesting potlucks with friends in lieu of pricey trips out can also add up to some serious sums.
Entertainment, celebrations and vacations
This feel-good spending classification can get unwieldy very quickly. The catchall for good times, this is where you’ll find everything from nights out with your peeps to spring-break jaunts to sunnier climes. Gifts clock in here, too.
Explore house swaps for vacations, or downgrade your accommodation needs by a star. And start focusing your gift-giving efforts on thoughtfulness instead of costliness.
Body and personal care
This category includes every single thing you spend money on to enhance your appearance. That means gym memberships, personal care products, haircuts, clothing and so on.
There’s a fair bit of elasticity in this spending category, too, so long as, again, you’re willing to forego a bit of the pleasure it delivers. In some cases, your choices here a just a case of bait and switch. Drugstore shaving and skin-care products are way cheaper than their brand-name counterparts, you might run outside or exercise at home instead of signing on for the gym, and there’s a huge swath of choice in where you go to buy your haberdashery. And so on.
Often, your emotions are the biggest enemy to your ability to stick to a budget. That’s why identifying the emotional triggers for your spending impulses is so important to this hotspot-finding mission. Are you spending in an effort to relieve tension, maybe? Boredom? To reward yourself for enduring some ordeal? Or are you making a link between your worth as a person and those material things you’re able to amass?
If your inner plumbing efforts reveal your self-esteem to be tied up with your spending on the latest toy or fashion, tuck that knowledge away for regular reference. And if you thinkyou might have a shopping addiction, check out 4Therapy.com’s compulsive shopping quizto confirm the diagnosis.
One way to cut down on emotional spending is to avoid making impulse buys. The next time you’re considering a purchase, whether it be in the flesh or on line, give yourself 24 hours to mull it over. You’ll often forget about the object of your affection as soon as you leave the store or flip to another web page. If it helps, keep a wish list of the items you’ve resisted buying so that you can return to them when you come into some cash or ask for them on your birthday.
You might also limit your exposure to what’s out there vying for your money on the premise that the less you’re aware of what’s available to buy, the less likely you’ll be to develop a sudden “need” for it. So unsubscribe to the rivers of advertising that stream into your inbox every day or download a program that prevents ads from appearing on your screen.
Scribble yourself a note to keep your reasons for introducing financial responsibility to your life front and center. Write, I’m getting serious with my money because and then fill in the balance with something meaningful to you, like “I want to visit New Zealand” or “I need to finally kill that student loan.”
The best budgets are flexible, personal and always subject to adjustment. Having identified the what and where of your personal expenditures, you can start to unravel the why.
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