Getting to Know Yourself – Know Your Spending

Learn tricks to responsibly manage your money and improve your spending habits.

Flexible Spending NumberWhy People SpendBreak Bad HabitsSpend Less Money

Budgets: The One Word in Personal Finance

“Make a budget!” “Stick to your budget!” “Budget, budget, budget!”

Unfortunately, keeping a budget doesn’t work for everyone. People can get frustrated when their spending changes from month to month but their budget doesn’t budge. Others get bogged down trying to keep track of how much they’ve spent in each of their dozen-or-more different categories.

If a monthly budget works for you, then rock on. If not, we recommend focusing on just one number: your net disposable income. Or, as we like to call it, your flexible spending number.

What is a Flexible Spending Number?

It’s the amount of money you have left over — to spend, invest, or save — after you’ve paid your essential expenses.

That’s it. Seriously. As long as you spend less than your flexible spending number, you’re in good shape. Spend more than your flexible spending number? You’re living beyond your means.

Having a flexible spending number makes your budgeting process less about having to stick to your spreadsheet, and more about prioritizing how you’ll spend your money. You can use that last discretionary dime for a fancy drink at Starbucks or put it in a savings account.

The Top 5 Reasons Why People Spend Money

In order to control our spending, we need to think about why we spend. We may think that we spend because we need or want something but sometimes the reasons run deeper.

Emotional Responses

How you’re feeling can affect how you spend. You may buy a pick-me-up when you’re feeling down or a treat when you’re feeling proud. This spending may be very satisfying, but don’t let your emotions control your spending.

Keeping Up With The Joneses

Some people project a certain image of themselves. This might include driving expensive cars, wearing nicer clothes, or eating at fancier restaurants, all of which can be expensive. The key to keeping up with the Joneses is to keep in mind that the Joneses may very well be trying to keep up with you.

An Offer You Can’t Refuse

Getting a good deal feels great. But is saving $100 on a $300 coffee maker with a built-in MP3 player really worth it? Sites like Groupon make it harder than ever to avoid the temptations of supposedly good deals. Always ask yourself if it’s something you’d buy if it weren’t a deal.

Rewards for Hard Work

“I’ve been working so hard. I deserve this.” That’s a nice thought. But sadly, your bank account balance doesn’t always increase in proportion to how hard you work. Don’t get us wrong, it’s not a bad thing to enjoy your hard earned money. Just be careful of using hard work as an excuse for lazy spending.

I Can Always Take It Back

It’s easy to justify a purchase by telling yourself you’ll return it later. But once you take it home, you start to get attached to it. And the longer you have it, the harder it can be to part with it. Save returns for getting the right sizes or exchanging broken items, not for you changing your mind!

Shopping Is a Habit, Not a Necessity

So in order to control your spending, you must learn to control your habits.

The following is based on Charles Duhigg’s book, the Power of Habit. We’ll focus on his rules for understanding compulsive spending habits, but they can be applied to all kinds of habits, from biting your nails to kicking your coffee addiction.

Anatomy of a Habit

A habit has three parts:

  • Cue — This is the trigger for the habit, which makes you engage in your compulsive spending.
    • Cue: Plan to get together with friends.
  • Routine — This is the trigger for the habit, which makes you spend money.
    • Routine: Eat an expensive dinner.
  • Reward — This is what you get out of the habit. It is the need that, consciously or unconsciously, you try to fulfill.
    • Reward: Have a good time and a good meal.

Rule #1: Identify Your Routine

As cliche as it sounds, the first step is admitting you have a problem. Many habits, particularly shopping habits, are subconscious behaviors. In order to learn to control those habits, you have to first identify them.

Ask Yourself:

  • What are you most likely to spend money on (junk food, clothes, video games, etc.)?
  • How often do you spend money when you probably shouldn’t?
  • Do you make a few large purchases or a lot of small ones?

Rule #2: Isolate The Cue

The cue triggers your habit and encourages you to spend. Learning to isolate your cue means you can preemptively avoid engaging in your routine. Pay close attention to your environment and state of mind when you engage in spending habits to identify what causes this behavior.

Ask Yourself:

  • Location: Where are you? (Driving by your favorite store? At a restaurant?)
  • Time: What time is it? (Weekend afternoon? Friday night?)
  • Emotional State: How are you feeling? (Happy? Sad? Bored? Hungry?)
  • Other People: Who’s around you? (No one? Friends? Partner? Kids?)
  • Immediately Preceding Action: What did you do right before you spent money? (Went to the mall? Drove to a restaurant?)

Rule #3: Look for Rewards

Once you’ve identified your cues, the next step is to identify the rewards.

Ask Yourself:

  • Why do you spend money?
  • How does it make you feel?
  • What benefit do you get out of it?
  • What craving do you have that your routine satisfies?

It’s not always easy to know what habits give what rewards. If you’re not sure, try experimenting. By changing your routine to see if it satisfies your craving, you can determine if it will help you kick the habit.

Plan to get together with friends.
Meet friends just for dessert, host dinner at your house or have a potluck.
Get out of house with friends, have a good time with friends or share food together

Rule #4: Have a Plan

So now what? Once you’ve identified your cues, routines and rewards, you can start to slowly change your spending behavior. When a spending cue is triggered, change your routine to something else that will supply the reward you’re craving. As long as the new routine saves money over the old routine, bingo! It won’t happen overnight, but given time, you’ll help cut your spending habits.

Have plans to go out to dinner with a friend
Host a dinner at your house
Have a good time with friends without spending too much money

Spending Less is Way Easier Said Than Done

It’s all well and good to say you can help control your debt by spending less. But let’s face it, spending less is tough. Fortunately, we’ve compiled a handy list of how-to tips for not spending money!

  • Always shop with a list and stick to it: That way you’ve already made the decisions of what to buy before you get to the store and won’t be swayed by advertising or impulse urges.
  • Don’t go shopping for fun: There are plenty of free ways to pass your time without hurting your wallet.
  • Pay your bills before the weekend: This will keep you from blowing the money you need to cover your bills on weekend entertainment or junk food.
  • Wait a week before an impulse buy: Chances are you will change your mind or realize you didn’t really want it.
  • Pay with large bills: Studies found that people have more trouble paying with larger bills than smaller ones. So if you’re comfortable with it, carry $50 bills with you (and ditch the plastic).
  • Have a no spend weekend: Make a commitment to fill your weekend with free activities like reading, having picnics in the park or teaching your pet new tricks! You can make an exception for groceries.
  • Take time to reward yourself: Limiting your spending isn’t easy, so reward yourself for good behavior (but don’t go overboard). Not only is it fun, but it will help reinforce your positive new habits.

[Image: How I Met Your Mother (CBS) via Giphy]

Getting to Know Yourself

Know Your CreditKnow Your PersonalityKnow Your Spending

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