Most of us admit that we could manage our money better, save more and spend less. And yet, we also tend to think that just having more of it would solve all of our problems.
The truth is, if you don’t know how to stop spending the money you already have, earning more of it isn’t likely to magically resolve your stress.
Studies show that somewhere between 25-38 percent of Americans live paycheck-to-paycheck, even among families earning more than $150,000 annually. In other words, you can be making $10,000 or more each month, but if you’re spending everything you earn, you’re still netting zero.
So how can you make sure you control your spending money and don’t get stuck in the cycle of living paycheck-to-paycheck, especially as your income and assets rise?
Most financial planners will tell you that you can get closer to your financial goals by developing a few simple money habits, namely budgeting, tracking expenses, spending less and reducing debt.
It can be difficult to establish new spending habits. We’ve created a list of steps you can take to get started toward your brighter financial future. Read on, pick a few and get started. You’re likely to enjoy the results enough that you’ll try some more.
1. Budget, plan and check in monthly on your progress.
Budgeting and planning helps you create a long-term view of your financial goals, from paying off debt to financing a home, vacation and retirement.
There are a lot of approaches to budgeting. One of the simplest to adopt is the “50/30/20” budget or spending plan. This means budgeting half your income—50 percent—on needs and obligations. These include rent or mortgage, food, utilities, insurance, car payments and minimum debt repayment.
Thirty percent—roughly a third—is for wants such as eating out, travel and entertainment. The final 20 percent—a fifth—is for saving and debt reduction.
Pro tip: As you craft your 50/30/20 budget, be sure to use your after-tax income when calculating how much to spend in each category. For employees, that number is take-home pay, not pay before taxes and the other items withheld. For self-employed people, it’s total revenues after expenses including taxes.
Put time on your calendar each month to review your budget against your actual expenses. If you want, find a friend to share your goals with and help each other be accountable.
2. Save for a rainy day.
Creating a budget that allows you to live within your means—even better, below your means—will help you start saving. Your first goal should be to build an emergency or rainy day savings fund. Only after you have an adequate rainy day fund should your attention turn to reducing debt.
Your emergency fund should be large enough to pay for three to six months of essential bills. Once you have established your rainy day funds, you’ll be better able to handle the occasional unexpected expenses such as car or home repairs or unforeseen doctors’ visits. Knowing that you can weather a storm will give you peace of mind and help reduce your financial stress.
Pro tip: Your grandmother might have kept emergency cash in the cookie jar or under a mattress. You’re better off stashing yours in a high-interest savings account that you won’t touch for daily expenses. This will give you easy access, while reducing your temptation to call Thursday sushi takeout “an emergency.”
3. Put your savings and recurring bills on autopilot.
It’s easy to forget to deposit money in your savings account when you’re paying bills from your monthly or bi-monthly paycheck. You might decide you’ll put five dollars in a sock each week and take it to the bank every quarter, but does that ever happen?
Instead, budget an amount for your savings and automate it. If your paycheck is direct deposit, you can likely have a portion of it deposited directly into your savings account. When the money goes directly from your paycheck to your savings account, you won’t be tempted to spend it on nonessentials. By saving a consistent amount each month, you’ll accrue savings faster and see real results.
Pro tip: If you have a side-gig, consider depositing most of it into your savings account while living off your main salary. Do the same with any cash gift or bonus that might come your way.
Likewise, skip the check writing and set up automatic payment for any regularly recurring bills. Paying essential bills like rent and utilities electronically can help you save money by avoiding late fees. The same is true for auto-payments of credit card minimums and loan payments.
Once you’ve set up automatic payments, you’ll grow accustomed to the lower, after-contribution amount of your paycheck. Many of your financial obligations will be paid regularly and living within your means will become less difficult.
4. Change your daily habits to spend less.
Not living beyond your means doesn’t mean never splurging; it means finding balance.
Once you have crafted a spending plan that lets you pay your basic bills and save a bit every month, keep looking for additional ways to improve your spending habits. When you spend significantly less than your income, you can save more and stay ahead of debt. Here are some good spending habits ideas to get you started:
Start planning your grocery run. Make a meal plan for your week, check the pantry and note what you need to buy. You’ll reduce your grocery bill by having and sticking to a list. Boost your savings with coupons and sales. The bonus? You limit your food waste, which is as good for the environment as it is for your wallet.
Consider shopping in bulk for nonperishable items. Pay attention to the price per ounce. If you use a lot of rice, for instance, a 5 lb. bag might be cheaper in the long run than buying a 1 lb. bag every time you go to the store.
Wait a beat to reduce impulse purchases. Walk away from the must-have sweater or gorgeous sunglasses. If you’re still thinking about them the next day, check your budget and go make your purchase. Chances are, you’ll have forgotten about them by the time you get home.
Eat in, pack your lunch and skip the coffee shop. The average American spends more than $3,500 each year on food eaten outside the home. Much of that is spent on things we can make just as well, and much more cheaply, at home. Take that steaming cup of coffee you need to start your day: Depending on where you live, and what you order, you’ll drop $2-5 a day at a coffee shop, for something that costs about $0.20 to make at home. That adds up!
Pro tip: When you do go out, consider sharing an entrée and limit your cocktails. You could easily cut your bill in half.
Less than a mile? Walk, ride a bike or grab your scooter. You’ll save money on transportation and enjoy some fresh air. If driving isn’t optional due to your location or circumstances, think about taking public transportation, carpooling or buying a used car.
Pro tip: When you do drive, plan your route ahead of time to help minimize mileage.
Monitor your HVAC, electric and water usage. Check the thermostat. Turning the heat down just one degree, or using a fan to keep the air conditioner at 76⁰F can reduce your utilities costs significantly. Change your light bulbs to compact fluorescent lamps (CFLs) or light-emitting diodes (LEDs). While they may cost a bit more upfront, the energy savings over time will reduce your bills. Reduce your water usage by turning the faucet off while you brush your teeth, install flow restrictors in sinks and showers and check toilets for leaks. And try reducing your shower by two minutes. If you own your home, consider installing low-flow toilets and energy efficient appliances.
Reduce recurring bills. Take a look at your insurance bills (auto, home, renters, etc.) as well as cell phone and cable bills. Assess your current contracts and do some comparison shopping. What can you renegotiate? Canceling magazines that you can read online or quitting a bad habit like smoking (or chewing gum or whatever you spend $20+ a week on) will save you money.
Pay off your debt. Sure, you can make the minimum monthly payment. But doing so on revolving loans (like a credit card) means that you continue to accrue interest, so you don’t really reduce your monthly spend effectively. Once you’ve freed up some cash with your new spending habits, consider consolidating your higher interest credit card into a debt consolidation loan. This kind of fixed interest, fixed term loan allows you to budget for a set regular monthly payment. And you’ll know exactly when your loan will be paid off.
Celebrate! Set regular goals and celebrate them. Every now and then, Thursday sushi or a great pair of sunglasses can be just the right luxurious way to thank yourself for creating spending habits that will help you achieve a bright financial future.