Many people seem to feel their money vanishes almost as soon as they get paid. But of course, that’s not the case. They just aren’t spending their money wisely.
Being wise with your money means being thoughtful and accountable and helping it go further to get what you want. It’s about having a plan so you can spend as well as save money for a vacation, an emergency fund, or even start that business you’ve been dreaming about.
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If you know how to be wise with money, it’s not all a matter of how much you make. It’s how you spend it and how you manage it so you can optimize your quality of life.
Related: Better money management tips
Why Spending Wisely Is Important
A harsh truth is that not many people know how to spend money wisely. It’s not a skill you’re taught in school, and many families don’t feel comfortable discussing money openly. Which means many of us are in the dark when it comes to understanding how to budget and not overspend.
Plus, the world is full of shiny, enticing new things to buy, and the media tends to be splashed with images of people dining out, shopping nonstop, and jetting here and there. The idea of spending limits is too often absent.
But if you’re serious about learning about how to reach your financial goals and not having too much debt, you can adopt habits that will help. It’s not about living a life of deprivation at all. But spending money a little differently is probably on the agenda.
The transition into adulthood and managing one’s own money can require focus. Unlike the days when you lived with your parents, your income is not all disposable. You might have rent or a mortgage to pay, a car payment, a student loan payment, credit card debt, and more. It can be overwhelming and feel like you’ve taken on too much.
But when you start learning how to spend money correctly, you can get on top of your budget and your financial life. That’s a great feeling of accomplishment and independence. Plus, it sets you up for good money habits for years to come.
Now, read on to learn 10 ideas for how to spend your money wisely.
1. Not Trying to Impress Others
When you buy something, check in with yourself and make sure it is something that is truly for you and not something you are buying because you feel you’re “supposed to,” “everyone is getting one.” or it will make you look “more important.” These purchases can wind up being very expensive and very disappointing.
Cars are a great example. There are many vehicles that may be adequate for your needs, but often, we buy pricey cars that look good to others, and we wind up living above our means. Sure, a fancy car is impressive. But being stuck with an unmanageable monthly payment is uncomfortable and adds a level of stress to your daily life. What’s more, if you default, it will likely hurt your credit score. So work towards buying just what you need, not status items.
2. Not Eating Out or Buying Coffee Every Day
Though small splurges every once in a while aren’t going to kill your budget, a regular habit of eating out or buying coffee can put a dent in your financial fitness. Everyday spending habits can make or break your budget. Perhaps it’s not coffee or eating out that is costing you; maybe it’s ordering things from Amazon all the time or picking up the tab too often when you and your best work buddy have a quick drink. All the small purchases you make add up over time. Remember, to blow $10,000 a year, you just need to spend $27 every day. Lots of little purchases can wind up undermining your plans to build financial health.
To make sure you’re spending wisely, be sure to have a budget for your splurges. It’ll feel good knowing you have a plan to spend on fun things while also putting money away in your bank account instead of eating it. If you’ve been getting a pricey takeout coffee most mornings as a treat en route to a busy workday, try taking that down to a Monday and Friday splurge for a while. Maybe you’ll then be comfortable reducing that further as you realize that taking a thermos of homemade java (your favorite blend) can be just fine.
Recommended: Creating a stress free financial plan
3. Setting Reminders for Bills to Avoid Late Fees
One of the least wise ways to spend money is on late fees, interest, and other costs that don’t contribute anything positive to your life. After all, you would probably much rather spend money on something you enjoy than on late fees.
To make sure your bills are getting paid on time, automate payments as much as possible and set reminders so you’re never late. Your credit score will thank you too.
4. Using a Journal of Transactions to Avoid Frivolous Spending
A journal of transactions can help keep you accountable to yourself about where your money goes. Truly, there’s nothing more eye-opening than seeing how much you’re really spending in a month. Reviewing your transactions can help you learn how to spend wisely.
For example, you might not realize you are as heavy a ride-share user as you are. You may think you only call an Uber “in emergencies” but then realize those emergencies are happening a couple of times a week. A journal can help you truly get a grip on overspending and dial it down.
5. Having a Monthly Budget
A monthly budget is nothing more than a plan for how you want to spend your money for the month. When you have a plan and a goal, you can train your brain to forgo things that are not important and save for things that really matter to you.
Which kind of monthly budget to set up depends very much on your personal preferences and needs. Some people love apps which automate the process and can show you how your money and spending break down in bar charts and the like. Others prefer using a spreadsheet or journal. Some find systems like the envelope method or 50/30/20 rule helpful. Do a bit of online research; you’ll likely spend more wisely once you find a system that suits you.
6. Figuring Out What Habits Eat Up Your Budget
After you’ve tracked your expenses, it might be shocking to see where your money is going. You might have a few habits, such as shopping too often or splurging on gourmet dining, that take up more of your budget than you would like. Or you might have unwittingly signed up for quite a number of streaming services when you only really watch a couple of them. Perhaps your weekend brunches with friends have gotten pricier than you ever realized.
By identifying what is burning through your money, you can then take steps to spend more wisely. Changing up a few of these habits can help you stretch your budget and spend your money wisely. You’ll probably open up some funds for savings, too.
7. Putting Money on Your Credit Card When You Can Afford to Pay It Off
You do not want to pay credit card interest. In 2022, the average credit card interest rate is close to 20%, making this one of the most expensive ways to finance a purchase. In a nutshell, you wind up paying a 20% surcharge if you buy things with plastic and don’t pay it off ASAP.
Paying interest on a credit card is paying for something that enriches the bank and does nothing for you. Using a credit card wisely can help boost your credit score, but “wisely” is the key word. You want to charge up no more than 10% (30% at most) of your credit limit to keep your credit utilization ratio low. And you want to pay the bill off ASAP.
8. Thinking About Long-Term Effects of Purchases
The average American spends $314 on impulse purchases each month, according to a recent poll. That’s nearly 4,000 after-tax dollars each year for unplanned purchases. If spending wisely is your goal, you should ask yourself: Wouldn’t that money be put to better use elsewhere, such as a vacation or an investment?
One trick to curb impulse spending is to acknowledge the emotional component. Some of us shop when we are feeling bored, angry, or sad. Purchasing some cool new gizmo or a great jacket can be a distraction and a mood booster. One way to short-circuit this emotional spending can be to imagine the item in your house and how it looks used a few years from now. If you can visualize its future (being out of style, faded, worn, or broken), you might not want to purchase it in the first place. Think of, say, a currently stylish pair of boots sitting at the back of your closet with other unworn impulse buys. That may help you realize that the item isn’t as vital as it feels when you are shopping.
You might also want to think about the long-term financial impact the purchase will have. If you, say, make a lot of impulses or splash out on a fully loaded new car, these costs can either snowball due to interest or shadow your finances for years to come.
9. Tracking Your Finances Daily
Following your money closely can help you spend wisely. Not that you want to be a slave to dollars and cents, but there are fun ways you can keep track of your spending in today’s technology-rich world, including money-management apps. These can connect your bank accounts, credit cards, investment accounts, and more to give you a snapshot of your financial health.
If, say, you see that your credit card balance is climbing, you might decide to cook pasta versus ordering takeout that night. Or perhaps you notice that with a recent rent increase, you are struggling a bit to cover all your expenses. That trend might convince you to economize some of your spending or start a side hustle to bring in more cash.
10. Knowing How Much You Can Actually Spend
A key part of your budget should be knowing how much you can actually spend in a month, as well as how much you should save per month. It sounds obvious, but many people don’t do the math. Figuring out and then hitting those numbers is important when you are focusing on spending wisely.
While the average household spends over $5,111 each month, your number will likely be different as it is unique to your circumstances. It’s wise to look at your take-home pay and see how much the “musts” (food, shelter, health expenses, and anything else needed to survive) cost every month. Next, assess what debts need to be paid. Do you have student loans you are paying off? Credit card debt you are whittling down? Great; subtract that from your earnings, too.
Then, you don’t want to spend every penny of what’s left. It’s important to also dedicate some funds to saving, whether that means for a down payment for a home, for retirement, or for an emergency (or for all of those). Budgeting $25, $100, or more a month to savings goals can help you reach your money goals. You might have that amount automatically transferred on payday from your checking account to savings accounts, so you can help keep your cash safe vs. spent.
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5 reasons to worry about your income more than your budget
When estimating how much you should put toward your student loan payments, a credit counselor might tell you to aim for 8% of your monthly gross income. But to get close to that number, you might find yourself budgeting until you’ve got the blues, trimming expenses left and right.
So what do you do when you run out of expenses to cut?
That’s the first of five reasons to spend more time increasing your income (and less scraping your budget) when attacking your loan debt or any other financial challenge.
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We all need to eat meals, live under a roof and have access to transportation. Bare necessities like these cost money. Try as you might, you won’t be able to trim your expenses to $0.
By downsizing your living situation and making smaller cuts, such as to the cable TV cord, you might be able to remove $500, $1,000 or maybe even more from your monthly budget. But there’s a limit to how far frugality can take you.
Your income, on the other hand, has no ceiling. Sure, you might feel unable to earn a six-figure salary if you’re a public school teacher. But you could always change your circumstances through education, hard work and goal-setting. Some options for our hypothetical teacher include:
- Advance your career: Become an administrator, such as a school principal
- Start a side hustle: Teach online, tutor off-campus or write textbooks
- Open a business: Create a teaching academy or tutoring program
If you’re not especially passionate about your job and are aiming for a higher wage, you could also take the more drastic step of transitioning careers.
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Forgoing typical expenses can get you out of a jam. Say you need to come up with your minimum student loan payment: Skipping a dinner out with your friends could get you all the way there. That’s the beauty of budgeting. Take from here to help out over there.
But what if you struggle to come up with your monthly payment every month, not just once in a while? Well, then you wouldn’t be alone. Consider that two out of five American adults don’t have the cash to cover a $400 emergency, according to a 2018 report from the Federal Reserve.
Increasing your income can get, and keep, you out of financial jams. With more money coming in every month, you give yourself much more leeway to save up and can account for unforeseeable events like a job loss or medical bills.
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By cutting “fat” in your budget, sure, you can meet or increase your monthly debt payments.
But increasing your income affects your ability to manage your debt, not just repay it.
If you have outstanding student loans and are hoping to refinance them to a lower interest rate, for example, lenders will want to take a peek at your debt-to-income (DTI) ratio. If your DTI’s out of balance, you could fail to qualify for low interest rates or be denied for the new loan altogether.
Some banks, credit unions and online student loan refinancing companies even require applicants to prove a minimum income to qualify. At top-rated lender Splash Financial, for example, you’ll need an income of at least $42,000, whether you have a lean budget or not.
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A budget-only approach ensures you live as affordably as possible. By prioritizing income, however, you can afford the lifestyle you actually desire.
For many people, the three big financial goals are saving for college, buying a home and investing for retirement. Others might have more unique goals, including funding their own business or traveling the world.
No matter your grand aspirations in life, you could view each of them as potential expenses. And it’ll be impossible to tack them onto your budget if your income hasn’t increased.
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By taking a money holiday, you should be able to create a budget and fine-tune it, canceling unnecessary subscriptions and negotiating your routine bills. It could take more than one day to downsize your car or lower your rent, of course, but these are relatively fast paths to saving.
Unfortunately, unless you receive an unannounced financial windfall, you’re not going to be able to increase your income as quickly. Even asking for a raise at work might take a while to hit your paycheck. Similarly, you might have to make a bit of an investment into a new side hustle before you start to see dividends.
Developing and diversifying your income takes months or years (some say it never ends) and there’s no clear-cut way for everyone to reach the heights they desire. If it’s going to be a long slough, even a worthy one, better to start now.
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Of course, increasing your income won’t do you much good if you don’t already have a budget (or, ahem, spending plan) in place. It can help you keep more of your larger income.
If you were recently promoted at work, for example, budget to utilize your raise wisely.
Still, the argument here is to obsess less over your budget and more about developing multiple streams of income. Unlike the former, the latter comes with a cushion.
This article originally appeared on StudentLoanHero.com and was syndicated by MediaFeed.org.
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