After getting through Christmas season and entering the new year, families everywhere are looking for ways to cut back on spending. The sad truth is that a majority of Americans are missing their greatest opportunity to save money.
A Gallup poll revealed that only 32% of American households “prepare a detailed written or computerized household budget each month that tracks your income and expenditures.” This means that 68% of Americans have no idea how much they are spending on their everyday expenses.
How A Budget Saves You Money
I went to a friend’s wedding who had planned the whole thing in less than two weeks. The good news is that the couple did get married. The bad news was that the wedding did not run all that smoothly. Things were forgotten, new problems popped up, and you could tell it was just not done as well as it could have been with a little more planning.
The same thing goes for your finances. When you do not have a plan, things do not go as smoothly as they should. The kids will need to get a cavity filled, you or your spouse will spend more than you thought you would at the grocery store, an appliance bites the big one, or one of your boys (I have three) will look at the others and say, “Hey guys, watch this!” If you are not a parent of boys, then you should know that this particular sentence usually results in a trip to the emergency room.
Having a monthly budget (or spending plan, if “budget” makes you twitchy) is a means of making sure that you have a plan for every penny of money that comes into your possession. You save money for those unexpected expenses so your finances do not get blown up when they happen and, most importantly, you figure out all the areas where you have been overspending.
Most families that I work with on figuring out their finances immediately see exactly where they are overspending as soon as they put it on paper. A common area is on food purchases. We get used to just going to the grocery store or going to a restaurant and not realizing exactly how much we spend
during the entire month. One gentleman came back to my office and explained, “I know where our retirement is going. We’ve been eating it.” Turned out he had been spending $500 a month more than he had originally
projected for food. Once he had this in order they were able to pay off debt and start saving for retirement simply by paying attention to how much they were spending each month on food.
Once you get through your first couple of months of budgeting and see exactly where you are costing yourself money, the next step is to put up barriers that keep us from continuing our overspending ways.
The best way I know to kill your overspending habit is to switch to cash. It is a scientific fact that we spend more when we use our credit or debit cards. People who use their card tend to focus on the benefits of the purchase instead of the cost.
McDonald’s figured this out and now their average credit card order is $7 while their cash orders average $4.50. That my friends, is a 56% greater purchase when you move from cash to card.
When we first figured out the overspending monster had hit our family, we started using cash envelopes. The way this works is you make your budget, take out that amount of money in cash, and put it in an envelope marked for what it is to be used for. Using the grocery shopping as an example, a family of five should be able to do all their grocery shopping for about $750 a month. If you get paid twice a month, then you take out $375 and put it in an envelope each pay period. When the money for groceries is gone then you don’t spend any more on groceries that pay period.
This can lead to some interesting meals at the end of the month, but it will insure that you are not overspending. For my family we used five envelopes: groceries, dining out, entertainment, personal care, and clothing. Just getting these areas under control freed up about $500 in monthly money.
Other Areas to Check for Overspending
The final area where a budget can save you money is in your recurring monthly payments. These are areas like your cable bill, insurance, or even utilities.
When you are budgeting you begin to see the fluctuations in your payments. For instance, we noticed that the electric bill was abnormally high one month. Instead of writing that off as an anomaly I contacted the power company and made sure that I did not have an energy killer somewhere in my house (like a bad hot water heater). Turned out is was just a very hot July compared to the recent years, but if there were a real problem I would have caught it instead of getting stuck with high electric bills for several months.
The other recurring payments you want to see frequently are those that you think are staying the same. Both the cable and insurance companies have figured out that if you raise people’s bills slowly over time, many will never notice the increase. Once you start budgeting you will see these bills every month and realize exactly what you are paying.
Maybe you will decide the cable bill is not worth it and it is time to cut the cord. Or you realized your homeowners and auto insurance have gone up over the last few years and you get new quotes to see if you can save on that recurring bill.
I had a client who had lost 40 lbs. and gotten in really good shape. He thought he was paying too much for life insurance so we got him a set of new life insurance quotes and his weight loss had pushed him down into a better classification. This saved him $300 a year in premiums, added 10 years to his term policy, and upped his amount of life insurance by $500,000. That is a huge win for him and his family.
While this monthly exercise of putting together a budget seems dreadful to some it gets easier over time and really will put you in the best possible spot financially.
One Last Step
Once you get your budget and spending straightened out, all you have to do is figure out what to do with that money. Maybe you start saving for a vacation, look to start some short term investments, or maybe you realized you are funding your goals as quickly as you like and decide to pick up a side hustle to get to those goals more quickly.
No matter what that last step ends up being for your family you will not get there unless you start budgeting today. So get out your paper or fire up your spreadsheet and start writing down all that spending. I promise that in less than 90 days you can get the hang of this budgeting thing and start saving money faster than you ever thought possible.