Managing finances can be a daunting task, especially with a constant flow of money coming in and going out. When we do not plan our finances, we are at risk of overspending. We are likely to spend money instinctively, only to ask ourselves later, “Where did all my money go?”
When you see that you are saving less than 5% of your monthly income, that you have no funds available in case of an emergency, or that your credit card balance does not go down, and your credit score is below 670; you are most likely spending more than you can afford. Fortunately, a few simple tips can help you regain control of your finances.
Study your spending habits to identify overspending
Having clarity of where your money usually goes is the first key step. To start, define your fixed expenses, that is, the costs that remain constant every month such as rent or mortgage, car payments, insurance and phone and utility bills. Once you know this amount, you are ready to use your detective skills and analyze how you spent the rest of your money in the past months.
If you make use of the so-called “plastic money,” that is, debit or credit cards, you probably receive a detailed monthly report that shows all of your transactions. Retrieve the bank statements from the last two months or more, and review them to study your spending behavior.
If you are a cash-only person, you’ll need to look at a couple of months’ receipts. If you do not normally keep them, this is a good time to get into this habit, as it will allow you to study your spending patterns in the coming months.
With your financial reports at hand, divide them into categories such as “groceries and food,” “gasoline,” “entertainment,” “personal and medical care,” “clothing,” “home and car repairs,” and “others,” with the latter group including unique one-time purchases. Add up the expenses for each subdivision and compare the amounts with the other months. This will help you see whether you tend to spend the same amount of money on each category monthly.
Define your financial goals
Are you planning to buy a house? Would you like to take a trip? Even the things that seem far-off should be considered in your daily money management, since small and consistent efforts are highly effective when it comes to addressing the financial aspect of our plans.
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If saving money is one of your goals, determine how much you would like to save and how much time you will give yourself to do it. Be as specific as possible, and break down your saving plan into smaller, more achievable steps; like how much to save each month.
If saving is not your priority, determine where you would like your money to flow based on your personal interests. Whether education, social activities, or charitable donations are your priority, decide on a monthly amount you would like to devote to these endeavors. This will help you organize your projects.
Tidy up your bank accounts or wallet
An organized environment is essential to a clear mind. Visual cues of how you divide your money helps you stay aware of the state of your finances and make informed decisions.
Setting up two separate checking accounts is a good strategy; with one account for fixed expenses and the other for all other transactions. Once you create these categories you can proceed to fund each account based on the information you gathered when studying your spending habits.
If you hold yourself to using each account only for its defined purpose, you can be sure that the most important monthly expenses will be covered and that any additional expenses will not hurt your finances in the long run.
The same approach can be used when handling cash, with the only difference being that the new checking accounts will be materially in your possession. Separate your cash into envelopes clearly marked with each category, and store in a safe place.
Build a buffer and an emergency fund
A buffer is the amount of money left in our accounts or wallets after we have made all our monthly payments. It is particularly useful when we have timing issues with our income. Ideally, a buffer is an entire month’s worth of expenses, but any amount is helpful.
Building a buffer can be a long-term endeavor or the result of a short but considerable effort. We can aim to consistently save a portion of our income to build the buffer over the course of several months, or more radically, cut back on non-essential expenses for a shorter period. Whichever approach you employ, you are sure to benefit from the peace of mind that comes with having a buffer.
An emergency fund may take longer to build but it will provide you with stability in case of illness or unemployment. Traditionally, the recommended amount would cover six month’s worth of expenses, although the Covid pandemic has led experts to advise up to one year’s worth. Building an emergency fund will require you to develop solid saving habits.
Differentiate between your “wants” and your “needs”
Truly understanding the motivation behind our purchases can be a determining factor in taking control of our finances. It empowers us to make conscious decisions instead of following our old overspending behaviors. It is as simple as asking ourselves: “Do I really need it? Or do I simply want it?” Try to be honest with yourself.
If you need something, you can make the purchase with full confidence that you are mindfully investing your money. After all, money is a tool to help us meet our needs and you have worked hard to earn it. But if you merely want it, think a little more about the purchase.
Check your finances in that category of spending. Can you afford it? Will it exceed the cut-off amount? Will it affect your ability to make ends meet? If you do not find your financial stability to be at risk, you are one step closer to buying it; but ask yourself one last question: Could you obtain the same result without spending so much money?
Consider the thrift option. Many quality items are donated to thrift stores, making shopping an entertaining “treasure hunt.” Alternatively, becoming a “do-it-yourselfer” can help you become more confident and independent. If it is a service, perhaps you can learn how it’s done. If it is an object, perhaps you could make it, or “make do” with something you already own.
If the purchase cannot be turned into a fun DIY project and your budget will not suffer for it, by all means treat yourself in reward for your financial discipline!