Many people are feeling the pinch as the holidays approach. Spending more on gifts, decor, travel and other expenses can quickly drain your finances. Even if you take out holiday spending, it is not easy to create and stick to a budget all year.
While there are many tips and tricks out there to successfully keeping daily spend in check, sometimes it’s just as helpful to take a step back and look at where the process might not be as strong.
A professional financial planner shared his top reasons clients fail to stick to their budgets with us. Spoiler: you’re likely guilty of a little of all three.
Budgeting is a difficult task
“One of the most important parts of maintaining financial wellness is controlling your budget,” Lee began. “Although it may sound simple, maintaining a budget is not an easy task—physically or psychologically.”
Physically, money can be at times be scarce and life doesn’t always stick to your budget. This can make it even more difficult to deal with unexpected expenses like a car repair that costs a lot or rising costs.
Psychologically, similar reasons can make it difficult to save money. Mental health is closely linked to how we spendMoney is our most valuable asset. This fact can lead to failure and, surprise, worse mental well-being.
Lee’s job is to help others manage their finances. Throughout his career, he’s seen three common budgetary pitfalls. Luckily, he’s also found solutions to all of them.
Problem 1: Uncontrollable discretionary spending
Investopedia defines discretionary expensesThe household’s cost of living. This category is also known as non-essential spending. It includes entertainment, travel, gifts, and hobbies.
These expenses are often quite small. It is easy to forget just how much each month we spend on these expenses.
It’s okay to have a $6 cup on the way to work. These daily Starbucks trips could cost you $120, at the end of the month.
Solution 1: 50-30-20 Rule
Lee suggests Lee using the 50-30-20 Rule to control non-essential expenses. The rule says that 50% of your net earnings should be used to pay for essential expenses. This includes utilities and housing, as well as groceries.
The remaining 30% of your net income can be used for discretionary spending. The remaining 20% can be used for savings like emergency funds, 401k contribution, and 529 plans.
Lee recommends that you start with savings, then move on to housing and then transportation.
“By employing this top-down approach, you ensure that you pay yourself first and then attack two of the largest budget categories,” he explained.
Problem 2: The ‘Lifestyle Creep’
Accountant Thomas C. Corley defined lifestyle creepAs a way to increase your standard of living in proportion to your income.
Lifestyle creep means that your monthly expenses rise at the same pace as your income. As a result, you notice no difference in the amount you can save—only the amount you spend.
Lifestyle creep can mean buying a house or car with a raise. It could be as simple a matter of increasing the number times you eat out per month.
Solution 2: Perform Budgetary Reviews Bi-Annually
It’s called a lifestyle CreepNot a lifestyle Sprint. Reviewing your spending over a long period of time is the best way to determine if your monthly habits have changed.
“By conducting reviews of your budget at least bi-annually, you can ensure that you are paying optimal prices, monitor inflation, and temper any temptation,” Lee suggested.
“While I am a firm believer in enjoying the fruits of your labor, I will caution you to do so in moderation,” he warned. This brings us back to our most common budgetary mistake.
Problem 3: Too Much Impulse Spending
A recent surveyIt was found that the average American will make 12 impulse purchase per year. I think this data is on the conservative side.
Many people succumb impulse buying not because of their financial situation, but because of it. “Impulse spending offers a sweet hit of dopamine,” Lee explained, “which might soothe [financial] stress.”
People living paycheck to paycheck are more likely to make impulse purchases. Add to this the stress of a global epidemic and generally poor mental health, and it’s no wonder that Americans are turning to retail therapy.
Solution 3: Financial Apps and Waiting Periods.
Lee suggested several solutions to this difficult problem. You can save money by waiting between 48 hours and a week for non-essential purchases.
Financial apps like Mint You Need A BudgetThese are great for reminding yourself of your short- and long-term goals. Keeping track of where your money should (and shouldn’t) go can ward off strong impulses to spend.
Lee recommends that you avoid online shopping. It’s convenient but dangerous. You can buy items with a click of a button. You can also withdraw money from your bank account.
Buying non-essentials at a brick-and-mortar store can keep you more in tune with how much money you’re spending.
Knowing how much you spend can help you to understand how much you can save.
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