Budgeting and Spending Strategies
Building a budget or a spending plan is tough. Sticking to the plan is even tougher. Thankfully, there are a few strategies designed to help you develop positive habits. These strategies will help you learn to save, stick with your budget, plan for emergencies, and control your impulse spending.
Budgeting Strategies
Budgeting strategies refer to different ways to approach the task of budgeting in order to build something that works for you. There is no one size fits all budget. Every person has different wants and needs, so your budget needs to honestly reflect what is important in your life. Otherwise it’s doomed to fail.
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Start with a Clear Goal
Budgets and spending plans are living documents. This means they should be updated every couple of months. Before you sit down to create your first plan or sit down to revise a current one, you need to have very specific goals in mind about what you want to achieve.
A good goal would be something like “I want to save $100 extra every month”, or “I want to rent a bigger apartment which costs $50 more than my current one, but I do not want to reduce my savings”. An ineffective goal would be “I want to increase my savings”, or “How expensive of an apartment can I afford?”. Setting clear, specific goals will help you actually reach them.
Think about the difference between “I will save $100 every month” and “I will save as much as I can every month”. Building a budget or spending plan around saving $100 every month is a clear and achievable goal. Just increase the amount you add to your savings, then reshuffle your other expenses to see if you can make it work.
If your goal is to save as much as you can, you will most likely cut spending from random areas, $10 on food, $5 on gas, and $25 on leisure activities. The amount you think you can save might be $100, but putting this plan into practice is much harder since it too vague. You have no way to gauge whether you’re hitting your savings goals.
Pay Yourself First
Budgets are easier to stick to when you follow a pay-yourself-first savings strategy. With this strategy, savings are taken out of your paycheck as an automatic transfer to your savings account, before the money enters your budget. If you schedule these automatic transfers to occur the day after you get paid, savings don’t need to be dealt with in your budget. The amount has already been deducted from your available income before you start.
This makes building a budget easier because you removed the stress of remembering to keep money aside for savings. If you decided to save a little more, your new goal would reflect saving $20 more each month, for example, and it could be achieved by adding a few extra dollars to each automatic transfer.
Divide Savings and Emergency Cash
All savings are not created equal! Ideally, you won’t make a withdrawal from your savings, unless you use it to invest. But in the real world, an emergency will come up, and you’ll need more money than what you’ve budgeted for. You don’t want those emergencies to break your budget for the month. Instead, you need to save money for those events too.
To keep your savings secure, it is a good idea to have a separate savings account, or safety box with emergency cash, that you only touch when you have an emergency expense. While you’re first establishing this fund, try to save enough to equal one month’s salary. Then, work to build it up to 3 months’ worth of your salary. That way whenever you have a financial emergency, you just dip into your emergency cash fund instead of withdrawing money from your savings. You’ll need to replenish your emergency cash in the next months, which is easier to remember than when you borrow from long-term savings. This strategy allows you to plan for emergencies while allowing your savings to continue to grow.
Spending Strategies
Using a budgeting strategy is a great way to help boost your savings, but most people need assistance in finding ways to control their spending. If you’re having trouble keeping your spending under control, consider these proven ways to keep cash in your pocket.
Keep Credit Cards at Home
If you struggle with credit card debt, your best move might be to remove your credit cards from your wallet and keep them in a secure place at home. This limits your purchases to cash or debit, and if you don’t have the money, you won’t be able to buy anything. This strategy will also help you avoid some of the shock when your credit card statement arrives.
Opt Out of Overdraft
Overdrafting is when your bank will let you spend more money that what is currently in your checking account. Banks offer this service to make sure your checks go through if you’re a few dollars short. This service is not free. Every time you overdraft, most banks charge both a dollar amount (usually about $25) and a percentage of your transaction cost.
Even though this feature seems like a nice gesture from your bank, you could easily get yourself in financial trouble. If you have a low balance in your checking account and need to make a few small purchases, every one of them could rack up a $25 penalty. And you won’t a receive a warning this is happening. If your checking account is regularly low at the end of each month, this penalty can be devastating. You can opt out of overdraft at any bank, which means your debit card will be declined if you try to make a purchase without sufficient funds in your account. This could cause a temporary embarrassment while shopping, but your finances will thank you later.
Never Order Anything Same Day
With the rise of e-commerce sites like eBay and Amazon, it became easier than ever to buy things you don’t need. If you find yourself receiving packages you can barely remember ordering, it might be time to stop making impulse purchases. One-click ordering options make it very easy to buy something you don’t really need.
Instead of buying something right away, add it to your wish list instead, and wait a week until you place the order. This has two advantages:
- While reviewing your wish list, you can remove the items you don’t really need.
- Retailers tend to email special offers and lower prices on products in your wish list.
This strategy helps reduce spending you will regret later, and you may get better deals on the items you do end up buying.
If All Else Fails, Use Prepaid Debit Cards Only
If you’ve tried these strategies and continue struggling to put a cap on your spending each month, there is one fool-proof way to go. Leave all of your credit cards and debit cards locked up in a secure spot at home. Set-up automatic bill payments, and savings transfers for your monthly savings goals. Once all of those items have been taken care of, take your remaining money and add it to a pre-paid debit card.
Now, you use your prepaid card for all purchases, both online and off, and keep this card as the only one in your wallet. You can even get cards for specific purchases, such as groceries or gas, and another one for leisure activities. This helps you put extremely strict spending limits on yourself, making sure you absolutely stick to your budget. And as you do this, you build positive financial habits by learning to control your spending.
Challenge Questions
- Why is it important to have an idea of how much you receive and spend each month?
- How might paying yourself first (saving first before spending) help your cashflow and budget?
- What are the advantages and disadvantages of having an overdraft?
- It has been said that to have more money, you need to go out and earn more, or cut costs. Which would you prefer to do and why?
- What is the opportunity of working more hours?
- Is it possible to relate value of money to time spent working?