Budgeting and Spending Strategies

Building a budget or spending plan is tough. Sticking to the plan is even tougher. Thankfully, there are a few ways you can game the system to make sure you stay under budget, and your savings continues to grow.

Budgeting Strategies

A “Budgeting Strategy” means different ways to approach your budgeting to build something that works for you. There is no silver bullet budget: every person has different wants and needs, and your budget needs to honestly reflect what you want to get, or else it is doomed to fail.

Start with a Clear Goal

goalBudgets and spending plans are living documents, and should be updated every couple of months. Before you sit down to create your first plan, or sit down to revise a current one, you need to have a very specific goal in mind.

A good goal would be something like “I want to save $100 extra a month”, or “I want to rent a bigger apartment which is $50 a month more than my current one, but I do not want to reduce my savings”. A bad goal would be “I want to increase my savings”, or “How expensive of an apartment can I afford?”. Setting clear, specific goals will help you actually reach them.

For example, think about the difference between “save $100 every month” to “save as much as I can every month”. Building a budget or spending plan around saving $100 extra every month is a very simple problem – just increase the amount of savings, then reshuffle your other expenses to see if you can make it work. If your goal is “save as much as I can”, then you are starting by just cutting out spending almost at random, probably by reducing how much you plan to spend on leisure activities. The amount you “think” you can save might be $150, but putting this plan into practice is much, much harder (since it requires you to give up a lot more).

Pay Yourself First

Budgets are easier to stick to with a “Pay yourself first” savings strategy. With “Pay yourself first”, your savings are taken out of your paycheck as an automatic transfer to your savings account before it even enters your budget. If you can set a regular schedule for these automatic transfers, savings do not even appear as an item in your budget or spending plan, just an amount reduced from your available income before you start.

This makes building the budget easier, because there is no stress each month on hitting your savings goal. When you work on rebalancing your budget, your new goal is just trying to add a few extra dollars to your automatic transfers.

Divide Savings and Emergency Cash

savignsAll savings are not created equal! Ideally, you will almost never make a withdraw from your savings account unless you are using it to invest. In the real world, emergencies happen, which will break your budget for the month (or more), like car repairs.

To keep your savings secure, it is a great idea to keep a stash of “Emergency Cash” in your checking account, about as much as one month’s salary. This way whenever you have a financial emergency, or the holidays roll around and you need to buy a bunch of gifts, you just dip into your emergency cash fund instead of withdrawing from savings. Then just replenish your emergency cash in the next month, while your savings continues to grow.

Spending Strategies

A budgeting strategy is great to help boost your savings, but most people need the most help with ways to control their spending. If you are having trouble keeping your spending under control, consider these proven ways to keep your cash in your pocket.

Keep Credit Cards at Home

If you struggle with credit card debt, your best move might be simply leaving them out of your wallet in a secure place at home. By keeping your purchases when out shopping down to cash or debit, you can avoid some of the shock when your credit card statement comes in.

Opt Out of Overdraft

“Overdraft” is when your bank will let you over-draw your checking account by a certain amount. Banks offer this service to make sure your checks for bills do not bounce if you are a few dollars short. This service is not free. Most banks can charge both a dollar amount (usually about $25) and a percentage of your transaction every time you overdraft.

This means if you are using your debit card for a day making small purchases when you are overdrawn, every one of them will rack up a $25 (or more) penalty, with no warning it is happening. If your checking account is regularly low at the end of each month, this penalty can be devastating. You can opt out of overdraft at any bank, which means your debit card will simply be declined if you try to overdraw. This might be a temporary embarrassment while shopping, but your finances will thank you later.

Never Order Anything Same Day

online purchaseWith the rise of ecommerce sites like eBay and Amazon, it is easier than ever to buy things you do not need. If you find yourself receiving packages you can barely remember ordering, it might be time to stop placing orders on the same day you find something. This is especially true with 1-click ordering options!

Instead of buying something when you find it, add it to your wishlist and wait a week. This has two advantages:

  1. You will look back later and just remove most impulse purchases.
  2. Sellers tend to email special offers and lower prices if you add something to your Wishlist without purchasing.

This will help cut out spending you would later regret, and get you better deals on the items you do end up buying.

Cost Cutting

Watch this great video from Bank of America showing how to make small cuts each day, adding up to huge savings each year.

Nuclear Option – Prepaid Debit Cards

If you continue to struggle putting a cap on your spending each month, there is one fool-proof way to go. Leave all your credit cards and debit cards locked up somewhere secure at home. Set up automatic payments and transfers to make sure your savings is transferred right away and all of your bills are paid. Once you have your remaining money, add it to a pre-paid debit card, instead of your normal bank card.

Now just use your prepaid card for all purchases, both online and off, as the only card in your wallet. You can even get multiple cards for multiple purchases, such as one just for groceries, and one for going out for dinner. This lets you put extremely strict spending limits on yourself, making sure you absolutely stick to your budget.

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