Controlling spending habits does not need to be difficult, in fact the process is a simple one. The difficult aspect of reigning in spending is deciding what you are willing to give up. By following these
5 steps, you will be well on your way to controlling your spending.
1) Find out what you are spending - You can’t control your finances if you don’t know how much you are spending. Track your spending for at least a month and be sure to record all expenditures, especially those paid in cash. Ask for a receipt and keep them in an envelope until you are ready to record them. The easiest way to do this is to use a program like Mint.com to keep track of where you are spending your money. I recommend setting an account up with Mint.com because this free service will automatically track and categorize your spending for you. I told you it was easy didn’t I?
2) Create a Budget – Creating a budget is probably the most important step in taking control of your spending yet most set themselves up for failure at this stage.
- Set Goals – A budget must take into account your personal and financial goals if it is going to work. Have everyone in the family write down short-term and long-term personal and financial goals and then share them with each other. If the family decides that a second car is needed or that an Ivy League Education is not possible, then these goals will become the basis for your budget.
- Make it Realistic – If Junior expects a car for his 16th Birthday and there is no room in the budget for it, leave it out. Junior will need to get a part-time job and save for his personal goal of owning his own car. On the other hand don’t expect family members to embrace a budget that has no money for entertainment.
- Everyone needs to take Ownership – In order to work, the entire Family must take ownership of the budget.
3) Focus on Large Discretionary Budget Categories First - You want to create quick and positive results so that family members will continue to be motivated and active in reducing spending. If you dine out 3 times per week try cutting it to once per week. Other discretionary spending categories that may yield quick spending cuts are entertainment, travel, and clothing. Reduce spending by reasonable amounts at first and then adjust spending cuts as needed. The goal is to show tangible results quickly without causing too much pain.
4) Monitor Progress – Like any good plan you must measure your progress against your objective, your budget in this case. It does not do any good to spend all that time creating a great budget if you have no idea how much you are spending. I know I sound like a broken record but you will need a budgeting app to track your spending habits. Mint.com is an excellent app because it allows you to enter all of your bank, credit card, investment, and loan accounts, create a budget, and then update that budget using transactions from those accounts. As you make purchases, your budget is updated and will show your progress toward your goal of controlling spending. Tip – Have weekly meetings to share progress on the budget with the entire Family. Build in a reward for meeting spending goals and be honest about consequences if spending exceeds goals.
5) What’s next? - I am not going to lie to you, creating a realistic budget and sticking with it is not easy. The next step is even more challenging but if you are determined to control your spending, you will be successful. Once you have several months of successful experience working with your budget, try to set more aggressive spending cuts if needed. Again the goal for reducing spending must be clearly explained to family members and you will need their buy in to be successful. A budget must be flexible enough to allow for those unexpected expenses so be sure to include an emergency fund in you planning.
How do you manage your spending habits?