If you talk to any financial planner or consultant, they will tell you the first rule in personal finance is to earn more than you spend, or in reverse, spend less than you earn, and save or invest the difference. This sounds like an easy thing to do, but it’s actually much harder for most people than you might imagine. If it is hard for you, here are five steps to help you spend less than you earn.
Step 1: Understand how much you currently spend each month.
A great number of people fail at budgeting simply because they do not include small expenses, or they seriously underestimate how much they are paying for certain items or services. On the first day of the month, write down every penny you spend. Be sure to note what you spent those pennies on. If you stop at the store on your way to work and purchase a soda and a pack of gum, you need to document this expense.
At the end of the month, sort out your expenses into categories. That soda and pack of gum will go in the food category. Other common categories for a budget include mortgage payments, car payments, fuel and auto maintenance, insurance, entertainment, and health care, although these are not the only categories used. You might need to include a category for child care or educational expenses. Every budget is unique. Add up the total of each category, and you now know how much you really spend each month. Prepare to be shocked.
Step 2: Compare your outgo to your income and make adjustments.
Subtract what you spend each month from what you earn each month. Don’t be too surprised if the result is a negative number. This means you are spending more than you earn each month. To cover the difference, you are probably using credit cards, borrowing funds, or not paying all the bills each month. These things are bad for your personal finances.
You are either going to have to earn more money or spend less. In most cases, it is easier to spend less than to earn more. First look at the food category. Can you skip the soda and pack of gum each day? Instead of eating out once a week, can you eat out once a month and cook at home more? You could stop buying convenience foods at the grocery store and start buying and cooking real food.
This change alone will probably reduce the amount spent in the healthcare category. When you shop, take advantage of sales, use coupons, and buy store brands instead of big name brands when possible. By making all of these changes, you can easily cut your food bill in half.
The next category to look at is entertainment. Hopefully, you have included the cost of your cable or satellite television service, internet service, and fees for various online games and streaming services in this category. You don’t have to cut the cable off, but you could save money by choosing a cheaper package. The same is true for your internet service. As for games and streaming services, how important are they to you? Can you find other forms of entertainment, or cut back to one paid online game and one streaming service?
If you are spending a great deal more than you earn, you may need to make some big changes. If you still owe money on your vehicle, consider trading it in for a different vehicle with a lower payment each month. If you are paying a mortgage, you may need to consider refinancing. If you are renting, you might want to try to find a place with cheaper rent.
Look at every category and make cuts everywhere you can. If you were shocked by how much you were spending, you will probably be shocked at how much you can actually save or invest each month when you cut out those unnecessary expenditures.
Step 3: Learn to Live Your Budget.
Too often, people make a budget and then completely forget about it the following day. You need to break those old habits and make new ones. Every time you open your wallet, you need to be fully aware of what you are buying, what category it fits in, and whether the purchase you are about to make fits into the amount budgeted for that category. If you buy the soda and gum, are you taking away money that is supposed to be spent at the grocery store on real food on double coupon day?
You need to make it a habit to continue to track every penny you spend. At the end of each day, or at least once a week, add up your expenditures and make sure you are not over budget on any of your categories. If you are over budget in one category, you will need to cut back in a different category to cover the difference. Until you have defeated your old spending habits, and you are saving and investing money each month, you have to live your budget. Treat it like a full-time job for a while.
Step 4: Stay home and offline.
When you leave home or you are online, you are at risk of spending money. Instead of meeting friends at a restaurant or bar, invite them to hang out at your place. Make sure they bring their own snacks and drinks, or do a pot luck where everyone brings a dish.
Take up hobbies that require little money, which you can do at home. Gardening, for example, doesn’t cost much if you are doing it on a small scale. Learn to knit or crochet. When you do leave home, go to the library and get some books to read. Have conversations with the other people who live in your home. Play board games or cards. Learn to be happy at home and offline and you will save a ton of money.
Step 5: Split your direct deposits.
Have two accounts and have your paycheck split and deposited into both accounts each payday. The first account is for bills. Automate as many bills as you can. Divide the total amount of all categories in your budget by 52. This will tell you how much money needs to go into that account each week to cover your bills. Don’t forget to include those bills that do not occur monthly, such as car registrations and your yearly state and federal tax bills.
The amount deposited into the second account is your money. If money is being deposited into that account each week, you’ve achieved the goal of spending less than you earn! It is up to you how you choose to spend this money, but from a personal finance standpoint, the smart thing to do is to put half into an interest earning savings account, and invest the other half into CD’s, money market accounts, or stocks.
Spending less than you earn isn’t easy. It requires you to pay very close attention, and to virtually dissect every cent you spend. But if you are diligently working to spend less than you earn each month, it will get easier and it will most certainly be financially rewarding.