The problem of spending more money than you have in your bank account is one that many people deal with regularly. However, doing this during times of economic uncertainty, increasing layoffs, and higher interest rates can be extremely risky financially. According to the WSJ’s analysis of recent data from the Census Bureau and Commerce Department, the percentage of US adult households whose monthly personal expenses exceeded their income increased by +2.6% for those that earned between $50K-$100K and +7.2% for those that earned less than $50K respectively. This may result in compounding debt, overdraft charges, and other money issues. Below, we’ve summarized 8 budgeting tips and strategies to manage your personal expenses for you to consider to avoid spending beyond your means:
1. Track Your Spending
Tracking your spending is the first step in preventing overspending. My wife and I are firm believers that if you can’t measure it, you can’t manage it. Record and categorize all of your expenses over the last six months into fixed vs. variable costs and review your spending patterns to identify opportunities to reduce your spending. To keep tabs on your expenditures, we suggest using tools that you are most comfortable with whether that is a simple spreadsheet (e.g., Excel or Google Sheets), an app like Personal Capital / Empower or Rocket Money, or even just a pen and paper.
2. Develop an Accurate Budget
A crucial first step in managing your finances is to create an accurate budget. You may prioritize your expenses and arrange your spending with the aid of a budget. List your fixed expenses first, such as your rent or mortgage payment, your utility bills, and other monthly bills. Next, make a list of your variable costs, including those for meals, entertainment, and shopping. Budget your spending and allocate your money to each category. There have been several popular budgeting approaches, but the most common one is the 50/30/20 rule which suggests that you allocate your after-tax income as the following:
- 50% for your needs and essentials such as housing, food, transportation and other bills
- 30% for your wants which includes discretionary spending or non-essential expenses
- 20% for your savings which include emergency fund, retirement and debt payments or other long-term investing financial goals
An alternative approach might be to look at your spending history over the last six months and understand your lowest month of expenses and the average monthly spend to inform goal setting. Take your time to define a realistic and comprehensive budget so that there are no gaps in your spending analysis.
3. Avoid Impulse Buying or Retail Therapy
Overspending is frequently caused by impulsive purchases. Before making your next purchase, stop and consider whether you really NEED this item or is it a nice-to-have. All too often, we make impulse purchases because:
- We feel that we need to reward ourselves after a long week…
- We feel the social pressure to purchase new items, get a more expensive car or go on a destination vacation beyond your normal means…
- We’re tempted that we’re getting a good deal due to a recent promotion…
- We tell ourselves that if we buy it, we’ll use it…
Whatever the reason, we’ve all made these purchases that are impulse buys or non-essential purchases. This behavior not only reduces your savings in your bank account, but it can also lead to your spouse or significant other getting upset and wanting to have their own impulse purchases as well, especially if you combine your finances! (Yikes, even more financial pain) Therefore, it is best to be intentional with your purchases and not to buy things that you do not need. Everything is now more expensive with inflation, especially the expenses that we consider as must-haves (e.g., food, rent/housing) and therefore, think extra hard before splurging on yourself on those impulse buys.
4. Use Cash and NOT Bad Debt
Avoid using credit cards (especially ones with high interest rates) and Buy Now Pay Later installment payment options for purchases as this can start a debt cycle. Having cash on hand makes it easier to control your expenditures. Withdraw cash and divide it into separate envelopes for each category of variable expenses. Once the money in the envelope is gone, you are not allowed to make any further purchases in that area until the following budgetary month. This will enable you to keep within your spending limit and prevent overspending. Exercise discipline and don’t cheat and go to the ATM to withdraw more cash to rationalize your spending.
5. Plan Ahead & Compare Prices When Grocery Shopping
Whenever you go to the grocery store, it’s easy to walk up and down the aisles and pick up unexpected items because either you see that it’s on sale or you might think that its better to buy more “just in case”. According to a survey by LendingTree, about 31% of respondents cite that they almost always overspend while at the grocery store. Another interesting insight from the survey is that 53% respondents cited going to multiple grocery stores. To manage your expenses relating to grocery shopping, make a list of the must-have essential items before visiting the grocery store so that you don’t overbuy items that you don’t need. Research the brands online and compare prices across brands at different stores to see if there are any deals and if there are any trade-offs that are less important to you. For example, my wife and I shop at Whole Foods and buy the 365 eggs rather than other brand names and therefore, we spend $4.99 vs. $8.99 for carton of 12 eggs!
6. Set Time-Oriented and Actionable Financial Goals
A great method to manage your money and curb your spending is by setting financial objectives and reminding yourself that achieving long-term financial goals is much more attractive rather than a short-term dopamine trap! Our secret has been starting with small, short-term financial milestones (e.g., payoff my credit card debt by “X” date, save enough for my down-payment for a new home by “X” date, grow my emergency fund from 6 months to 1 year of safety) and setting dates and a plan to achieve these goals. Visualizing the path to reaching those goals may help psychologically and more likely force you set aside money rather than spend it. Wouldn’t we all like to work less during retirement or not have sleepless nights not knowing how we’re going to pay the bills? Having a distinct financial objective can aid in keeping you on track and preventing overspending.
7. Automate Your Deposits into Savings, Retirement & Investment Accounts
To save money and prevent overspending, set up automatic transfers from your checking account to your savings and retirement accounts. By automating your savings into a high yield online savings account or CD and your retirement accounts (e.g., Roth IRA, 401K), you can reduce the likelihood that you’ll spend money that could be used to achieve your financial objectives. It might even be better to have separate accounts between your checking and savings and retirement accounts so that they are not with the same bank. In fact, savvy individuals have even used direct deposit / ACH from their employer to automatically split up their paychecks into their spending, savings and retirement accounts so that they don’t even have to think about how to allocate their income and the logistics on transferring money from their checking account to each of their individual accounts!
8. Unsubscribe to Unnecessary Subscriptions
Many of us pay monthly or annual fees for services we do not utilize. Review your subscriptions and cancel or downgrade any that you don’t use frequently or require. This can help you save money and avoid overspending. Consumers are increasingly using new applications such as Rocket Money to find and cancel subscriptions efficiently.
In conclusion, avoiding overspending is vital for preserving financial security. You may prevent spending more than what is in your bank account by keeping track of your expenses, making a budget, avoiding impulsive purchases, paying with cash and not debt, setting financial goals, automating deposits into savings and investing accounts, and eliminating pointless subscriptions. Always keep your financial objectives in mind when making decisions especially given the ongoing possibility of a near-term recession.
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