I learned early in life that spending less than you earn, paying yourself first, and investing for the long term can pay huge dividends over time. But I never really followed a budget, and only recently decided I needed to implement one.
During this process, I discovered that there are a few simple things you can do once a year or so, and a few simple things you can do every day that will help you control spending without the complexity of a traditional budget. The key comes from periodically identifying areas where you can eliminate or trim expenses, and implementing a plan to help you control spending in the comparatively few areas where your day-to-day choices make a difference.
You can also use this strategy with something like a traditional budget to help focus on where to trim expenses and save more.
Understand your income and expenses with tracking tools
If you are not already doing so, start tracking your income and spending history. There are now many good free tools to do this, including PersonalCapital (my favorite), YNAB, Mint, and others You may also do it the old fashioned way(by gathering bank statements, etc.), but there is no reason not to take advantage of these electronic tools.
Triage your spending into three categories
After (automatically) collecting and categorizing your spending into categories such as rent, groceries, etc., many budget experts recommend dividing expenses into “non-discretionary” and “discretionary” items, or “fixed” and “variable” items.So, for example, your rent or mortgage is typically considered a “non-discretionary” or “fixed” expense, and your cable TV bill is considered a discretionary expense (which may or may not also be variable).
But these categories do not help you identify where to trim. Your rent may be a fixed, non-discretionary expense, but you could move to a cheaper apartment or get a roommate. And sure, your cable TV bill may be discretionary, but if you have already decided you want cable TV (and can afford it), does it really matter whether it is “discretionary” or “variable”?
So, instead of the usual triage, triage your spending into three categories that put you in control:
- spending you won’t change;
- recurring bills you might change; and
- spending you are willing to control on an ongoing basis
Before you do this, however, spend some time exploring some of the other “Saving Money” posts on this site to shake up your existing conception of what should go into category 1.
Category 1—Spending you won’t change.
If you are happy with your residence (and can afford it), your rent, mortgage, and many other items will likely go into Category 1. You will, of course, want to revisit Category 1 if your circumstances change. But for the most part, once you have identified what belongs in Category 1, you can largely ignore the items in this category going forward.
Category 2—Therecurring bills you might change.
Category 2 typically includes those recurring bills where you signed up for a service and haven’t thought about it since. Typical examples include insurance, internet, music subscriptions, etc. Over time, these bills can add up. Moreover, new and cheaper services often become available. Accordingly, identify all the potential candidates for this category, and decide whether you can eliminate the bill completely, or find a cheaper alternative. Then do your homework.
Is the $100/month for satellite TV really worth it? What about a cheaper service? Could you eliminate your landline completely, or switch to something like Ooma? Switching service providers for phone, cable, and other similar services (or just threating to leave) will often result in immediate savings.
Insurance is another area where carriers will often raise rates over time, so comparing prices annually makes sense.(Make sure you also pick a company with good claims history.)Generally, once you have worked through your Category 2 items, you only need to revisit them annually or so.
Category 3—The ongoing spending you are willing to control.
Category 3 items include the comparatively few areas of spending where the daily choices you make affect your spending. It is this final category of items where small choices add up to big savings over time. Perhaps you are not willing to give up your pay-per-view habit, but you are willing to limit your consumption to $10/month?Items like eating out, groceries, clothing, and entertaining also often fall into Category 3.
Each person/family is different, and working through categories 1 and 2 helps identify the items that remain where you can make small changes. And, if you get through all three categories and still spend more than you earn, revisit Categories 1 and 2.
Implement a system that works for you to help control your Category 3 spending
Once you have committed to exercising discipline over your Category 3 spending, implement a system that will make that easy. Perhaps the simplest system is the classic envelope system, where you put money for each budget item in an envelope each month (e.g., groceries, eating out, etc.), and spend from the envelope. Fortunately, there are also now some good free online/smartphone tools like Good Budget,
Fortunately, there are also now some good free online/smartphone tools like Good Budget, Mnvelopes, and others that allow you to set up virtual “envelopes” for your discipline categories. If you are overspending on eating out, for example, you can choose to skip the soda at lunch, eat at a less expensive restaurant, or eatat home. You are now in control.
Keep it simple
Although you should periodically examine your larger lifestyle choices, once you have decided you want cable TV, there is no point in dealing with it as an ongoing budget item.Spending discipline thus does not have to involve controlling every category of spending to make a difference.
It only requires implementing a system to control your spending in the comparatively few areas where daily discipline matters. And make sure to revisit Categories 2 once a year or so, and revisit Category 1 if your circumstances change. Happy saving!
About the Author: This is a guest post from Thomas L. Hudson, J.D., Ph.D. who tweets for @WhatWorksRW, which focuses on evidence-based strategies to improve the real world on topics ranging from social policy to personal finance.