How to Stop Overspending: 7 Steps Toward Taking Control of Your Money
May 5, 2020 by
1. Create a Budget (or Improve Your Existing Budget)
Here’s a simple process to get you started:
Start a Spreadsheet. Create a spreadsheet to categorize different expenses and types of income, whether it's on excel, online or on pen and paper - do what works best for you.
Calculate Your Income.Calculate the total amount money you’re making from salary, wages, tips, and any other sources of income.
Calculate Your Expenses. Create a category for fixed expenses to find out what you are paying for each month such as your utility, credit card, mortgage bills, and whatever else you have to pay each month.
Calculate Your Variable Expenses. Entertainment, clothing, groceries, gas, and more are variable expenses since they vary each month. Start to allocate funds to each variable spending category. Base your numbers on how much you’ve spent in the past, but also try to reign things in a bit. Some may find that if their budget is too tight, they are setting themselves up for later splurges and failure.
Don’t Forget To Save. Try following the “50/30/20” rule: 50% of your monthly income should go to fixed and necessary expenses, 30% to fun stuff and lifestyle choices, and 15% to savings and 5% toward paying off debts. When it comes to saving money, make sure you consider multiple bank accounts for different methods of saving or paying bills. For example, you could have a regular savings account for emergency expenses and an IRA for your retirement.
Put Your Budget To The Test. Compare the actual amount you spend versus what you estimate that you are going to spend per month. See where the difference between your estimates and the actual amounts paid per month.
2. Switch to Cash
If you’re having trouble with credit or debit cards, you may want to switch to a cash-only envelope budgeting system. With this, you force yourself to stick to the plan and when your money runs out then you’re done spending. A helpful tip is to get envelopes for all your variable expenses and label each one according to how much you’ve allocated in your budget.
Not everything is a one size fits all method, so make sure you allow some flexibility. You could also create a weekly envelope and draw out 20s (or smaller bills) as the week goes along - whatever you’re most comfortable with. Remember, small steps forward lead to great financial freedom later down the road.
3. Choose Cheaper Entertainment
Changing habits may be the hardest aspect of curbing your overspending because you may think that means not going out with friends. All you have to do is change your plans and place that you go out - you can always stay in with your friends. This is always easier said than done.
Is your experience with your friends/family less meaningful if you invite your friends out for a cup of coffee instead of a pricey dinner - maybe even going out to the park? It’s okay to let the people in your life know that you’re trying to spend less. After all, it’s the same the same thing when you go on a diet because it helps increase your accountability. A budget is no different in that way. Sometimes, friends or family may be grateful for the example you’re setting and would follow along with your idea.
4. Set Short-Term Financial Goals
Some suggestions for setting goals to keep your money in check is as follows:
Save at least 10% of each paycheck in a separate account.
Stick to a cash budget for two weeks, see how your spending changes
Save $1,000 in an emergency bank account.
Bring lunch to work every day for a week instead of ordering in.
Easy short-term goals like the above, can help fundamentally shift how you view and use money. They can also be a bit of a challenge, so pat yourself on the back whenever you achieve one. The goal is to be less impulsive and more conscious of your everyday spending.
5. Zero Out Your Accounts
The goal every month is not to zero out your account. The goal is saving money in order to not be financially struggling if a last minute bill or expenses comes up because we all know that life happens.
If you’re on a cash budget, withdraw the necessary amount and pay your bills. Avoid the temptation of blowing the rest by moving it to another account, such as a savings account or a retirement fund. The goal is to not spend the money just because you have it but save the money to pay for things later in life like that new car, house or college for your kids.
6. Think Context
Factor in the context of the situation, is your spontaneous purchase worth it? Is that vacation worth it? Are those new clothes worth it?
If you think about spending $2,000 on a spontaneous vacation and you make $20 per hour at work, it will take you at least 100 hours to earn that money to pay for your vacation – not factoring in taxes. Think about the context of using that money to get out of debt, start a retirement fund, or even buy a car. Understanding the value of money to your personal financial picture is an essential element to changing the way you think about spending.
7. Reward Yourself
Remember that it’s okay to give yourself little rewards now and again to stay on track. Remember that it’s ok if you fail, it’s all about trying and following through to make sure you find something that fits your needs/schedule/habits.
If you love a certain item such as clothes, fine dining, travel or entertainment then put a little cash aside or load up a prepaid debit card for a reasonable fun expenses. This is your financial journey, which isn’t meant to stop you from having fun but to help you stay on track with your financial wellness.