Many people struggle with financial discipline, not knowing how to spend their money wisely and save for the future. While this happens to everyone, it primarily affects people with low incomes, who find it hard to set money aside for anything other than paying bills.
With the proper financial knowledge, you can understand what you bring in, how you spend it, and identify ways to cut back on the expenditure and save. Here are some smart spending tips to improve your financial health this year.
Have a Budget
This is one of the best and most effective ways to track your finances. Having a budget gives you control over your money, helps you track expenses, and gives you more peace of mind. It also helps you set up expenses based on priority, making it easier to eliminate unhealthy habits.
When creating your budget, add up all your income after tax to determine how much you are starting with. You should then add up all your expenses, including the fixed and regular ones like insurance, rent, utility bills, and mortgage. You should also include variable expenses like entertainment, groceries, and gas.
While it can be hard to determine how much you will spend for this, you can get an estimate by looking at your receipts and credit card to see previous spending.
The final step includes subtracting the expenses from the income and determining how much you will save from the remainder. It is also essential to keep some money aside for emergencies.
There are several ways to create a budget depending on your income and how you want to store your money.
- Percentage-based budgeting- This is the most common budgeting type, which follows the 50/30/20 rule. It states that you use 50% of your income after tax for essential needs, 30% for wants, and 20% for savings plus debt repayment. While this percentage works for many people, you can change them depending on your goals.
- Cash envelope budgeting- As the name suggests, this budgeting method involves having several envelopes, each assigned to different expenses. You should then add the amount you want to spend for every need in that envelope. Once the money is over, you can’t use money from another envelope, but if it remains, you can add to it or leave it as it is.
- Zero-based budgeting- This method involves budgeting for all your income after tax to the last dollar. This makes it easier to avoid using excess money on anything.
When creating a budget, start it as a trial and error, then keep improving on money allocation as you understand your needs better. You should also review your budget often to ensure you are on track.
While you can use pen and paper to budget, numerous budgeting software are available. Automating the process makes it easier to track.
Use Cash To Shop
While sometimes it is hard to carry cash everywhere, especially when making big purchases, it helps to ensure you don’t overspend. Using a credit card is one of the easiest ways people overspend without even noticing.
If you can’t use cash, use a prepaid credit card. Unlike the conventional credit card, this one sets a limit for you because once the money you load into it ends, you must reload to use it. It also keeps your money safe because if you misplace the card or someone steals it, they can only access the money you load into it.
Avoid Impulse Buying
This is one of the primary ways people spend more money than they realize. It is possible that you can’t afford to buy everything you need at once with your income. This means you only buy one or two things at a time, depending on how much they cost. Having spending priorities helps you determine what you need sooner, helping you to avoid impulse buying.
You should also look at daily expenditures for small things like ice cream or an extra coffee. While it is nice to buy yourself nice things, you should stop and ask whether you need them or if you can spend that money in a better way.
Another way to avoid impulse spending is to have spending and saving long-term goals to guide your expenditure. For example, if you just moved into a new house or want to move out of your parents’ house, you can set goals to help you renovate or buy decor items.
One of the ways to keep track of your goals is to make them smaller and more attainable and write them down. Ticking each goal off after achieving it helps track how far along you are and where you should change things.
Sometimes you might see something you have wanted for long, but the cost goes above your budget. While some circumstances require you to buy the item or service immediately, sometimes it is better to wait it out.
The item or service will likely go on sale or have a discount later after the demand has fallen. You should also list such items and look out for deals or shop for them during offers like Black Friday.
Keep a record of your expenses
Always keep your receipts and statements with you to review. This will show you how you spend your money, making it easier to pinpoint things you can cut off the expenditure list.
Avoid Last Minute Purchases
Sometimes, like during the holidays or special events, the hottest things come out right before that season. They are, however, the most expensive, making them hard to buy. Instead of buying gifts, costumes, or other things before the season, check them out off-season.
Their low demand also means lower prices. You can also hit thrift stores or market days. They sometimes have high-quality and unique finds you might not find in shops for a much lower price.
Financial discipline is one of the most challenging things to maintain, especially if you have a low income. However, developing good spending habits will help you save without restricting your spending. Ensure you research all the options or reach out to a professional for more advice.