How your spending habits can help or hinder or retard your financial goals was examined in Part One of this blog. And to change your habits you need to examine why you do what you do.
Many New Year’s resolutions center around curbing over spending. Listed below are five reasons that may influence your spending habits. In addition, possible strategies on how to deal with the issue and to change your habits are also described.
1. You Have No Idea How Much You Spend
Often you don’t know what you are spending. You therefore have a hard time predicting what your spending will be in the future or controlling it now. Indeed, some folks hate having to deal with this topic and actively avoid it.
This is the one area where an app like Mint.com or a year-end credit card statement can help you understand your monthly expenses. It is only when you have a list of your monthly expenses that you can see whether you are spending money on the things and/or people that matter most to you.
In addition to understanding your monthly spending, some expenses are annual in nature (e.g., auto insurance, travel, dues, holiday gifts). These expenses are just as important to list to provide a complete picture of your spending.
The strategy is to write down all of your outflows each month and each year. You can categorize them as you see fit such as Entertainment or Food and Dining. Study the statement and identify those areas that you would like to change.
I can’t stress enough that you need to have an understanding of your spending in order to begin to change it.
2. Mind your Mood when you Spend
Research shows that people in bad moods tend to spend more and save less. And conversely happy people often stick with their intentions.
Examine when your overspending occurs. Is it used to deal with stress in other aspects of your life? Are you spending as a form of entertainment? Are you going to the mall (or online) just to browse but then end up spending?
One strategy is to examine your mood when you spend on daily living or discretionary purchases. Review your purchases over the last week (e.g., shopping online, coffee shop purchases, lunches out, taxis, etc.) and see if you can identify your mood. Only then will you be able to adjust your spending moving forward.
3. Time versus Money Trade-off
The old saw is that you pay either time or money but hopefully not both. One of easiest ways to spend money is on convenience. Planning, on the other hand, is free.
I was recently reminded of this fact when I was trying to get to the airport for a vacation with my bike suitcase (yes, its big but on wheels). I failed to think it through the night before and ended up using an Uber SUV with surge pricing that cost me $98 for a 20-minute ride. Had I planned just a little bit, I would have taken a Blue Van for $35. It galled me to no end throw $60 out the window for lack of planning and convenience.
The strategy here is to find those things that you can plan for and then set time aside each week to actually plan for them. I try to use Fridays to get a head of the things that need to be done the next week.
4. Penny Pinching in the Right Way
Do you focus on the percentage saved (“save 30%”) rather than the amount? Advertisers know that humans focus initially on the discount and not the underlying price. “Fifteen minutes could save you 15 percent…” Sound familiar?
My favorite example is penny pinching for gas (save the $0.02/cents gallon) but failing to make sure homeowners and auto insurance coverage is appropriate for your situation. The benefit of just a little bit of time can make a big difference.
The strategy here is to make a list of those things you pay monthly (auto and homeowners insurance, cable and cell bills, subscription charges, etc.) and take the time to finding a better deal on each.
Moreover, take your time to find the best deal if you have a large purchase on the horizon (e.g., new television set, appliance, home furniture) rather than on the discount received. Also don’t try to buy on the first day you go shopping. A good night’s rest can make a world of difference.
5. Saving Money at a Low Rate Instead of Paying Off a High Rate Debt
This issue is one of my favorites because folks feel they are doing the right thing. They keep saving (e.g., $100/month that earns 1.05%), but carry a credit card balance that charges 18% on the balance and all new purchases. There is no math in the world that will ever make this trade-off a good deal. Better to pay off the high interest credit card rather than save and earn a pittance.
Although I applaud the sentiment to save, reduce the savings to a very low amount so you can keep savings, but don’t pay the high interest charges.
In sum these five reasons may help you identify and help change your spending habits. The key is to identify the spending habit and to establish a new routine to address it.