Learn Where All Your Money Goes and Fix Budget Leaks
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Sometimes, it's easy to overlook all of the tiny little "leaks" in your budget. People often don't realize how much they're spending. It's easy to think that you're not buying anything lavish. You're not dining at the Ritz. You're not flying to Paris. You don't drive a Mercedes-Benz. Where on earth is all of your money going?
Discovering Your Budget Leaks
Let me ask you a few questions:
- Do you pay more than $10 for a haircut? Do you pay to get your hair professionally dyed or styled? Do you get your nails done?
- Do you buy coffee from Starbucks? Do you buy bottled water? Do you buy ice cream, cookies, soda, or other junk food?
- Do you occasionally grab lunch out when you're on the go? I'm not talking about a fancy restaurant -- I'm talking about grabbing a burger or a burrito from a fast-food or quick-serve restaurant.
- Do you drive places where it's possible to walk? Do you own a car that has poor gas mileage? How recently did you shop around for car insurance, comparing quotes?
- Do you have a pet*? Are you paying for vaccinations, food, and veterinary care?
All of these represents the most common ways in which people spend money. These are all discretionary purchases.
The "Problem" With Discretionary Spending
None of these discretionary purchases are "wrong" or "right." They're simply choices. If you want to spend money on these items, you need to cut other expenses out of your budget.
The core of budgeting is prioritizing: Cut the expenses that are less important to you, so that you can leave room in the budget for the spending that really matters.
Alternatively, you can also pay with your time by earning more money. This will also give you more flexibility in your budget.
The bottom line is that even though you're not flying to Paris or dining at the Ritz, you're still doing plenty of discretionary spending. That's fine. There's nothing wrong with a little discretionary spending. But in order to afford it, you need a plan in place. That's why I recommend creating a budget.
Here are a few of the most popular types of budgets:
- The 80/20 Budget -- Good for people who are "big-picture" minded, not detail-oriented.
- The 1-Hour Budget -- Good for beginners.
- The 50/30/20 Budget -- Good for people who are "in the middle" between detail-focused and big-picture minded.
- Three Budgeting Worksheets -- Good for people who want to optimize, and who are detail-oriented.
A Note on Pet Expenses
*I know you don't like to think of having a pet as a discretionary spending. I get a lot of objections to that statement from people who protest that their pets are a part of their family. By the same token, I also hear from people who would love to have a cat or dog, but feel that they are not financially stable enough to afford to care for a pet.
Don't get me wrong: I absolutely do not think that you should give up your pet. They provide you with love and comfort. But you should recognize that this is an expense that you have chosen, and in order to afford it, there are other luxuries that you will need to give up.
Perhaps you'll find that you can afford either a pet or a nicer car, but not both. Or maybe you need to work an extra five hours each week in order to afford Fido.
Budgeting is, in part, the practice of staying aware that you're making these trade-offs, and it happens with everything, not just pets. If you choose to buy lunch out every day, then you might need to stop dining out for dinner, or work a few extra hours a week.
Framing expenses this way can help you prioritize what's important to you.