Budgeting is as essential for the home as it is for the workplace.
Would you spend an extra $3,000 on a new Keurig coffee machine for employees? If the old one is still working, then probably not.
Then why would you spend without any rhyme or reason to upgrade your car, or take an Alpine vacation just after getting back from Seychelles?
It is not a question of how much money you earn as much as how much you spend. Famous boxer Mike Tyson was once worth $400 million but lost it all due to reckless spending. Same for Michael Jackson, who died $500 million in debt.
It’s All About Trimming the Fat
Too many are confused about how to cut down on expenses. It’s simple: Trim the fat.
How do you do it?
- Track your expenses
If you are not disciplined, this step will be tough. Track every cent you spend, whether by cash, bank transfer, check, or credit card.
Be it a $2 pack of peanuts or an $8,000 down payment on a new SUV, write it down. Something about the actual act of writing down all of your expenses makes a connection between spending and your brain.
Spending boosts dopamine, the pleasure hormone. That is why shopping is as therapeutic as eating chocolate. Putting it down in black and white lends it clarity.
- Categorize your expenses
- Groceries
- Utilities
- Gasoline and transport
- Mortgage
- Car loan payments
- Card repayment
- Memberships
- Clothes
- Eating out
- Cable
- Internet
- Phone
- Entertainment
This part is not that difficult. Most of your expenses can fit in a limited number of categories:
These categories will likely vary depending on your needs and spending habits. At most, two dozen headings are possible, and most people would have a lot less. Make sure to classify everything you spend over the course of a week.
Essential vs. Nonessential
If you study the classifications above, you will find that not all have equal weight in your life. Some categories like mortgage, groceries, utilities, and car loan payments are obviously essential. Of course, you cannot live without food or your vehicle.
Some, such as entertainment and eating out, are not as mandatory. You could safely go a month without eating out and not miss anything. Yes, it would be an adjustment, but that would be bearable.
What is essential? Whatever you need to make your life function smoothly and without which your life would be impossible or next-to-impossible.
Non-essential expenses are those that could easily be postponed. If you have five pairs of sneakers, you can go without buying a sixth pair. The same goes for a brand-new 4K television or your third destination vacation of the year.
Using the 50-20-30 Rule
The 50-20-30 rule, or some variation thereof, is the golden rule for expense management.
Let’s see how it works. The large number of expense headings can fall under three different types.
Living expenses: These should take up about 50% of your income. These include necessities like food, gasoline, mortgage, tuition fees, utilities, etc. There is very little scope to cut back on any of these expenses.
Savings: Out of your total income, 20% should be directed to savings. If you can put in more, that is better, but try to save at least 20%.
Discretionary Spending: Whatever remains of your income after the above two are subtracted can be spent for your pleasure. This includes vacations, eating out, buying fancy gadgets, and so on.
The 50-20-30 rule sets you free. You do not have to feel guilty about impulsive spending (within reason) because you know that you have met your savings target and secured your future.
Resilience to Peer Pressure
This is by far the most challenging part of keeping to the above plan. Can you take the social stigma of being a “penny pincher”?
Would you be able to give up the bragging rights completely?
That is why adhering to a strict budget is much more than filling out an Excel spreadsheet. It is a regimen, which means you have to prepare yourself mentally just as you would for a new diet or fitness activity.
You must commit to a significant behavioral change, which can be unpleasant at first. You would feel depressed and powerless (very similar to quitting junk food), but you have to stick with it because of its long-term benefits.
Spending is instant gratification. It makes life more bearable. Spending is an effective counter to the stress you feel daily.
To retrain your mind takes time and effort. The only way to change yourself is to literally internalize that every cent you spend now is a cent (or three) less in your rainy-day fund.
