We’ve all been there: A moment when we look at our bank account balance and wonder how this could have happened. Don’t beat yourself up for overspending. Instead, get it under control using this five-step process:
1. Track Your Spending
It’s hard to make a change if you don’t understand your current financial situation. Start by tracking your spending for one to three months. The longer you track it, the better understanding you’ll have of trends and your real money habits.
There are many ways to track your expenses. Apps like Mint can sync with your bank accounts and automatically track where your money is going. But apps aren’t the only way. Budget planning spreadsheets that track spending are available online. If you have Microsoft Excel, you can download a number of free templates. You can also create a DIY spreadsheet that suits your needs.
2. Evaluate Where Your Money Goes
Once you know where your money goes, sift through your transactions and sort them into these three main categories:
- Fixed expenses: These are set costs you must pay every month no matter what (think your rent or mortgage).
- Flexible expenses: These are things you have to buy, but you can exercise some control over how much you spend on them (for example, groceries and transportation costs).
- Discretionary spending: This is anything you didn’t sort into “fixed” or “flexible” expenses, like going to the movies or buying new clothes.
3. Identify Where You Spend Too Much
It might be easy to see where you spend too much money. Do you spend $800 a month on food because you eat most meals out instead of buying food at the grocery store to prepare yourself? Are you treating yourself to $1,000 shopping sprees each month? Did your daily latte habit add up to way more than you realized?
If you need to cut back, go through the discretionary category. This is where you spend on what you want — not strictly what you need.
4. Align Your Spending with Your Values
You don’t necessarily need to immediately eliminate your biggest discretionary expenses — but you do need to carefully consider each one. A $200-per-month membership to a boutique gym is expensive — but if you’re passionate about your health and fitness, actually use all the benefits of being a member and value the results you get, it makes sense to keep it in your budget.
On the other hand, maybe you realized that you spent $400 per month on breakfasts and lunches during the work week. What’s more important to you — buying convenience meals or saving for a big trip? Would you rather hit up all the lunch spots around your workplace or invest that $400 to grow your wealth?
5. Create a Budget That Includes What You Value (and Cuts What You Don’t)
When you think before you spend, you may realize that buying the latest and greatest stuff doesn’t actually make you happy. You might see that you actually feel more satisfied when you cut the frivolities and use that money to fund a financial goal or save for something you really want (like a home or big vacation).
Make sure you use your money to attain things that are important to you — and then set up a budget that helps you maintain that habit over time. Start by creating your budget around the things you have to buy, or those fixed and flexible costs. Then, allocate money toward your savings and investment goals. Mindfully choose how you’ll spend any money left over and create additional budget categories to accommodate it.
You can take advantage of your Employee Assistance Program to get help setting up a new budget that will get your spending under control.