Starting a journey towards financial well-being requires more than just earning money – it calls for thoughtful planning, strategic decision-making, and making a dedicated commitment to saving and budgeting. In this blog, we will dive into an easy-to-follow guide and helpful techniques to create savings plans and budgets. I will share with you what I believe to be some of the best practices to help give you control over your hard-earned money.
· Track Your Expenses. Keep a record of all your expenses, no matter how small. This will help you understand where your money is going and identify areas where you can cut back. There are many apps, spreadsheets, and interactive documents that can help you track everything. I don’t believe one is better than the other, so find the one that works for you!
· Create a Realistic Budget. Make a budget that aligns with your income and financial situation. Be sure to include essential expenses like bills, groceries, phone, and savings, but also allow for some discretionary spending. Find a method that works for you, but also, adjust as needed.
· Prioritize Savings. Treating your savings plan as a non-negotiable expense will help keep you accountable. Aim to save a percentage of your income each month, even if it's a small amount. Over time, it can add up significantly. Establishing achievable milestones will help maintain positive momentum to save.
· Set Financial Goals. Having clear financial goals can motivate you to stick to your budget. Whether it's paying off debt, saving for a vacation, or building an emergency fund, having goals in mind can help you stay on track. Also, celebrating milestones is a great way to stay motivated!
Use the 50/30/20 Rule:
50% of your income to needs (essentials)
30% to wants (discretionary spending)
· Dining out
20% to savings and debt repayment
Now this is a flexible guideline. You can adjust these percentages according to your financial situation. The cool thing about this guideline is that it can be customized to tailor fit with almost any financial situation!
· Cut Unnecessary Expenses. Review your expenses regularly and identify areas where you can cut back. Small changes, like reducing dining out or canceling unused/free trial subscriptions can make a big difference. Some common examples of unnecessary expenses are daily coffee visits, impulse buys, excessive online shopping, buying the latest technology, paying for apps that you rarely use, etc.
· Avoid Impulse Spending. I think this is one of the biggest pitfalls when it comes to budgeting and spending. Before making a purchase, give yourself some time to think. Impulse buying often leads to regret and overspending. Impulse spending occurs more often when you can see and feel the products. This type of sale makes up for almost 80% of all impulse buys.
The Diderot Effect refers to the phenomenon where the purchase of a new possession, often a luxury or high-status item, leads to a spiral of consumption as a person's possessions or lifestyle choices are upgraded to match the new item. Basically, old possessions look out of place, or you need to buy more things to complete the desired “look.” The term originated from an essay by French philosopher Denis Diderot, who described how receiving a new robe as a gift made him feel dissatisfied with his older belongings, motivating him to replace them with newer, more expensive items that matched the new robe's stylishness. First, he replaced his old straw chair with a new armchair covered in Moroccan leather, then his old desk was replaced with an expensive writing table, which lead to a downward spiral of reckless spending.
This effect highlights how one purchase can set off a chain reaction of increased spending.
If you notice social media or TV advertisements, they often display an entire outfit instead of the specific item that you were looking to purchase. As a result, these advertisements tend to stimulate impulsive purchases, which encourage consumers to buy additional things to complement their initial purchase.
Additionally, this effect can translate over to new hobbies. As you become more skilled and devoted in your new hobby, you might catch yourself buying more expensive, higher quality items to enhance your experience. I love playing golf, but I will still have a slice with a lower quality club vs what the professionals use!
· Use Envelopes or Categories. For discretionary spending, use a system where you allocate cash or set a spending limit for specific categories (e.g., entertainment, dining out). This can prevent overspending. Once you have reached your limit in one envelope, avoid taking money from another one!
· Automate Savings. Setting up automatic transfers to your savings account ensures that your savings contributions are consistent. So, sit back and watch your savings fund grow!
· Avoid Lifestyle Inflation. As your income increases, resist the temptation to increase your spending. Instead, allocate the extra income to savings, paying down debt, or investments.
· Planning for Unexpected Expenses. Budget for occasional expenses like holidays, birthdays, or vacations. Also, start setting money aside for the unexpected. This will help prevent these expenses from disrupting your budget. So, when your A/C stops working, and it’s 115 degrees outside, you have a plan already in place and funds available for this situation.
· Review and Adjust. Regularly review your budget to see if you're staying on track. Life stages and circumstances change, so be ready to adjust your budget as needed.
Ultimately, budgeting comes down to personal preference and what suits your needs, rather than a one-size-fits-all solution. Checkup regularly, and adjust as needed!
Nate Trisler - Vice President, Training Coordinator