Less Cherry-picking, More Information

Many people do not realize how much of an impact on our lives that daily spending habits have. How we spend our money on a day-in-day-out basis affects our psychology and mental health, adding or alleviating stress and worry, peace of mind and general enjoyment of life.

And yet, given this sizable impact that daily spending has on our lives, it’s amazing how many people tool along spending money without a single thought about budgeting.

I know, budget is a scary word for some people, boring to others, and has arduous connotations for many. But a simple household budget does not have to be a complicated process and could pay off in significant ways. After all, a budget is nothing more than a chart of data that can guide and inform spending habits.

The number one error many people make when formulating a spending plan is cherry-picking certain expenses to cut, as if this one or that one is causing the budget shortfalls. Not enough money at the end of the month? Cancel the sports package from the cable television bill. Unable to pay all your bills? Eliminate luxuries like dining out or shopping for clothes.

A solid spending plan is more complex. The first step in gaining control of your finances should be gathering information, not cherry-picking expenses you can cut.

Such cherry-picking is the first line of thinking for many families and individuals, and it’s a mistake. It’s likely not the sports package that got you into financial trouble and cutting it will probably not solve the problem sufficiently. But for some folks, a good financial plan is like a diet or a fitness plan—no pain, no gain. I’ve seen too many clients try this approach, and they may be able to hold the spending line for a while but only end up bingeing on a large expense eventually, taking on more debt.

As a financial coach, I've been helping people build successful budgets for more than 25 years. It all boils down to three basic steps: 

1. Track exactly what you're spending for at least 30 days, preferably 60 days. Collect receipts for every penny you spend, even if it’s for a candy bar. Once you have that information, chart it out in categories like food, utilities, entertainment, etc., and compare it with your total sources of income.
2. Think about creative ways to increase your income—start a part-time business, perhaps, do some consulting, buy and sell items, or request a raise.
3. Look for ways to trim the budget. Now, armed with a full picture of your spending, it may be time to find sources for savings. Some examples: use coupons for retail purchases, eliminate your landline, carpool or bike to work, review your insurance policies, install solar panels, cut back on soda and drink more water. Ideally, find ways to cut costs while improving your health or standard of living; these types of win-win changes in your budget are usually the most successful and likely to endure. 

Importantly, once you've gathered your data and designed a budget, don't regard it as a structured box you must live in no matter what. A budget is a work-in-progress, always subject to revision. Allow flexibility and wiggle-room. Treat yourself now and then (just make sure it’s only an occasional treat!), even if it doesn’t always fit perfectly within your budget.

How we spend our money has enormous long-term effects and makes a substantial difference in how much debt we carry for how long, the growth of our savings and investment accounts, and our ability to plan for the future.

I hear comments almost every day from clients caught up in constant financial shortfall. “I make enough money,” they might say, “but I don’t know where it goes.” Or “I don’t do anything expensive, I don’t go out, I don’t spend money foolishly, I should have enough.”

That is the logical result of living without a household operating budget. Shadow expenses—catching a movie, perhaps, or a quick dash into the market on the way home for bread and milk, a stop by the hardware store for a new door fixture—are not considered. By the end of the pay cycle, before another payday has arrived, you find yourself running short but don’t understand why.

Discipline is not about feeling guilty over our spending habits and punishing ourselves by removing things we enjoy. Rather, discipline is about taking the time to get a clear picture of what you spend, what you make, and how best to make them coincide comfortably over time.

Money should be enjoyed. The best way to enjoy spending money without causing undue stress is to create a solid, realistic spending plan, full of information, not cherry-picking.