If you’re constantly scolding yourself, “I can’t have this,” or “I better not buy that” when it comes to spending money, then your budget is too strict, just like the worst kind of diet.
“One of the main reasons budgets fail is they are too restrictive,” says Ellie Kay, family finance expert and author of “Lean Body, Fat Wallet.” “People create budgets that are impossible to live with. It’s like going on a liquid diet to lose weight which is also not sustainable. Either way, you are setting yourself up for failure.” She says that restrictive budgets can lead to binge spending just like a strict diet can lead to binge eating.
A recent question polled by the National Foundation for Credit Counseling (NFCC) found that many people misunderstand the true purpose of a budget. Fifty-seven percent of respondents said they viewed a budget as a restriction on their spending instead of viewing it as the freedom to choose how to spend their money.
“People consider ‘budget’ a four-letter word that restricts your spending and makes you miserable,” says Gail Cunningham, spokesperson for the NFCC. “Instead, it is meant to free you to spend your hard-earned money just as you wish.” She says not making conscious decisions or a plan to spend your money is making a decision to spend it carelessly and impulsively on whatever you want or need in any given moment.
Cunningham advises you track your spending for 30 days to see if you are satisfied with how you spent your money and also to identify areas to change. Then, instead of making a new budget, create a sustainable spending plan by following the steps below.
Set financial goals first
Many people skip this important first step because they are focused on the necessary bills. Once you track your spending, you’ve probably got some goal ideas based on spending habits you’d like to change.
“Get those goal ideas down on paper where they become real. Use online tools and calculators to determine a realistic timeline to pay off credit cards, save for a vacation or college fund, and see different ways to approach your goals,” says Kay.
Some other short-term goals include eliminating late fees or beefing up your emergency fund to stop emergency credit card spending. Some long-term goals include starting that IRA, contributing more to an employer-matching 401K or starting a college fund for your child’s college expenses. Maybe you want to get a better paying job.
“Spend an hour per week thinking about your finances so that your financial goals and your progress toward them are always fresh in your mind,” advises Kay.
Factor in fun
Diets that include nothing you love to eat are hard to stick to because they are no fun and so are strict budgets.
“In order for a spending plan to be sustainable you must factor in some kind of fun,” says Kay.
Adding something enjoyable to your plan — even something as little as going out for frozen yogurt with toppings instead of dinner or going camping instead of to Disneyland — can add the fun without excessive expense. Another fun factor might be saving up for a large planned purchase. As your financial goals are met and money is freed up, you can increase the fun amount accordingly so that you are enjoying the freedom to spend and save your money as you wish.
Pare down necessities
If your financial goals include important financial safety nets such as an emergency fund and paying down debt, check your past 30 days of tracked spending and see what you can do without to fund your financial goals when it comes to both necessary and unnecessary bills and spending.
“Find ways to ways to shave just $10 off each necessary expense, which you won’t even miss,” says Cunningham. “Suddenly you’ve got $100 extra dollars to add to your spending plan.”
Some examples include paring down your cable or satellite TV service (or for bigger savings, removing it entirely in favor of Netflix and Hulu Plus and a streaming device), removing digital home phone service if you have cell phones, raising and lowering your thermostat settings to save money on heating and cooling costs, setting up text alerts or automatic bill pay to avoid wasting money on late fees, planning errands better to save gas, and using coupons or coupon codes whenever shopping.
Kay adds, “Most people underestimate their unnecessary daily spending greatly and the awareness of this spending can further free up substantial cash to use toward goals,” says Kay.
“Since most people don’t have lots of extra money every month, learning to make active trade-offs is a key to a successful spending plan,” says Kay.
If the family goal is a vacation, something as small as foregoing one weekly fast food purchase frees up $20 or more per week, around $1,000 in a year, to pay for the hotel. “Even children can understand that trade-off and can be reminded that they are eating home tonight because they are saving for a trip,” says Kay. College students can understand that living at home and attending college nearby might be a worthy trade-off for reducing their student debt.
Kay says to make the spending plan a family affair. “When everyone agrees on a plan that includes reaching financial goals, paying bills easily and family fun, then everyone can help each other stick to that plan.”
Naomi Mannino writes about personal finance and contributes to several websites, including MoneyRates.com and Schools.com .
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