Like many people, you’re probably struggling to stay afloat with your bills, debt payments, and other expenses, not to mention the frequent credit card purchases. It seems like you don’t know where your money goes; cash just slips through your fingers as soon as it arrives. Here’s how to gain control of your spending before it gets out of hand and starts controlling you.
In This Article
1. Understand how your cash flows through your life
Gaining control over your money starts with understanding how it flows through your life.
Most people’s cash flows through their life in this order:
- Fun Stuff (movies, Starbucks)
- Variable expenses (groceries, gas, medical costs)
- Fixed Expenses (mortgage, rent, car payments, insurance)
- Savings and Investments
This kind of spending is what makes most people live paycheck to paycheck. They first spend on the fun stuff, then on variable expenses, and then on fixed expenses, and maybe if cash is left, they’ll put it into savings.
To quote Jim Rohn, “Poor people spend their money and save what’s left. Rich people save their money and spend what’s left.”
On the other hand, wealthy people do it the other way around:
- Savings and Investments
- Fixed Expenses
- Variable Expenses
- Fun Stuff
Wealthy people will first put a percentage of their income into savings and investments. Their first priority is their future. They then pay their fixed expenses, followed by variable expenses, and finally on their fun stuff.
You don’t have to be rich to start spending this way. You can start doing this as soon as your next paycheck. Pay your future self first, then spend on your most essential expenses, and finally use what’s left on the fun stuff.
2. Set a limit to spend on each category
Like I mentioned earlier, it’s all about being in the driver’s seat and telling your money where to go to avoid money slipping through your fingers.
You, therefore, need to set strict parameters on how you spend. Don’t spend anything above the parameters you set. How do you do this?
Remember the expense categories mentioned earlier?
- Fun stuff
How much are you willing to spend on each category?
First on the list is the savings category. How much will you allocate to savings? $500? 5% of your income? It’s advisable to save between 10%-20% of your income.
Next on the list are fixed expenses. These are the same every month and rarely change, for example, mortgage payments, rent, car payments, insurance premiums, phone bills, etc.
While they’re called ‘fixed’ expenses, it doesn’t mean that they can’t change. When talking about cutting back, most people think about limiting their Starbucks spending or other small guilty pleasures.
Consider this: If you cut out your daily $4 coffee for a month, you’ll only save $80. If, on the other hand, you move to a less expensive neighborhood a few minutes away from the city, you could save up to $500 on rent.
Fixed expenses offer the most significant opportunity to reduce your spending drastically.
What if you gave up driving and decided to use public transport instead. That’s a couple of hundred bucks saved on gas, insurance, maintenance, and car payments every month.
A less drastic solution could be switching your expensive car for a cheaper one to reduce your monthly payments by about $150.
What if you shopped around for better deals for your car insurance(Policygenius) and phone subscriptions? All these are options to consider to make a massive difference in your spending without killing the fun.
These are expenses that vary from month to month, for instance, groceries, gas, clothing, etc.
Now, after subtracting your savings and fixed expenses from your income, you have an idea of how much you can spend on variable expenses.
You can now tell your money; instead of spending $800 on groceries, I’ll spend $600. Instead of spending $500 on clothing, you decide that you have just about enough clothes and will only spend $300.
This category is essential. In the spirit of frugality, many people remove this category entirely. Doing that will make your life miserable, and your spending plan will be at the risk of failure.
So it’s time to tell your money how much you’ll spend on your Starbucks coffee, vacations, movies, or manicure. After allocating money to savings, fixed expenses, and variable expenses, you now know how much is left to spend on the fun stuff.
Allocate it wisely on the things that bring you the most joy. If you love vacations, you could decide to do your manicures at home so you can spend a bit more on your vacation. Or choose to watch movies at home or your friend’s place.
3. Use Tracking Tools
Setting strict amounts to spend for each category is easy. Sticking to the plan is challenging. Fortunately, there are apps built for this exact reason: to help you stay within your set parameters.
Try out YNAB, Mint, or Personal Capital. They allow you to connect your checking accounts and credit cards and categorize every transaction into set categories.
The best part is you can always check how much is left in a category before making any purchase. If you really want to gain control of your spending, that’s the secret.
Taking the steps mentioned above to gain control of your spending puts you in the driver’s seat when it comes to your money. When you place your expenses where you want them and tell your money where to go, you’re dominating your cash.
Instead of feeling like you’re sacrificing and feeling all miserable, you’ll feel like you’re gaining control over your money, and you’ll spend without guilt. It’s an empowering feeling. Try it.