Is Your Spending Out of Control?

By: J.R. Barrington
Submitted: 2007-01-17 16:16:08
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We’ve all heard the expressions that describe the problem:

“I’ve got too much month at the end of my money!”

“I owe! I owe! So it’s off to work I go!”

“Can I use my Visa to pay my MasterCard?”

Although we all laugh a little when we hear these comments, the underlying problem that creates the all-too-real situation they describe is anything but funny.

Tell-tale signs are all around us:

Although America is the world’s wealthiest country, we also have the highest percentage of people that are merely in survival mode until the next paycheck arrives.

A recent study from ACNielsen revealed that about one in every four Americans say they don't have any spare cash.

According to CNN, the average credit card debt per household reached a record $9,312 in 2004. That's an increase of 116 percent over the past 10 years.

Approximately 35 million Americans pay only the required minimum — as low as 2 percent — of their balance each month.

The Wall Street Journal reported that 70 percent of Americans live paycheck-to-paycheck and Parenting magazine found that 49 percent of Americans could cover less than one month's expenses if they lost their income.

The 2003 MetLife Study of Employee Benefits Trends reported that 52 percent of employees live paycheck-to-paycheck and, among high-earners ($75,000 or more), an alarming 34 percent claim this distinction. The survey found that 87 percent of low earners ($30,000 or less) do so.

This article is offered to help you decide where you might fit into this spectrum of how personal finance is managed. We will explore specific ways how you can measure your own situation and then identify some ways you can regain control of your life.

First, let’s explore some guidelines on a well-designed budget that you can use to compare to your own spending habits:

35-38% Housing
17-19% Transportation
14-16% Food
6-8% Clothing and Services
4-5% Health Care
5-6% Entertainment
8-19% All Other (Savings, Charity, Vacation, Interest, etc.)

Now compare where your money goes against these guidelines. If you are below these ranges, you are to be congratulated! If there are some areas where you are over, these are your places to concentrate on improvement.

Here are some additional signs that you might be overspending:

1. Spending a raise before you even receive it.

2. Juggling multiple kinds of debt (mortgages, home equity loans, credit cards, lines of credit, installment loans, student loans, etc.)

3. Less than 3 months of savings to carry your expenses if you should lose your job

4. Carrying credit card balances for more than 3 years

5. Can only go on vacation by using credit cards to pay

6. No idea how much money you spend shopping each month (a truly devastating addition many people don’t even recognize)

7. Not taking advantage of your employer’s retirement savings plan and losing its contributions to your account

8. Having to choose who gets paid this month and who has to wait

9. Making no distinction between your actual wages and using a credit card for income

By now, you should be able to tell if you can be accused of overspending or might just need a little tune up to get some things back in line. There is always great temptation to use credit as a replacement for real income, but this practice often leads to bankruptcy or loss of a home.

So let’s spend some time identifying ways you can help your situation:

Take the time to sit down and actually track your spending. Take each check you’ve written and each charge you’ve made and categorize the expense into one of the ones we’ve mentioned above. Make that effort for at least each of the last three months so you can try to identify any trends or tendencies you may have. For example, do you shop more or eat out more frequently if you’re upset or under stress? These tendencies can actually add to your financial woes. Keep tracking your expenses each month to keep these items in check. You might begin to see how quickly the innocent $25 expense here or there begins to quickly add up over the course of the month.

Inexpensive software packages such as Quicken or Money are available that make it very easy to keep these records where the entries are literally just like filling out a check onscreen. It will then automatically assign the expenses to a category and then generate reports and graphs that will help you to understand your spending and how you’re doing against the guidelines. These tools will save you tremendous time and will also give you a snapshot of all of your bank and credit accounts in one place making your money more real to you.

Once you have a handle on what you’ve been doing, set up a budget that falls into the above guidelines. Literally make a list of items you’re paying every month and organize those into the categories and then establish some limitations on discretionary expenses like clothing and entertainment. Your first budget doesn’t have to be perfect the first time. You will need to adjust it occasionally as you make progress in some areas such as paying down debt.

Figure out why you overspend in some categories. We mentioned the earlier examples of going to a department store or out to a restaurant because you’re stressed or upset. Many people just decide they don’t care and begin to just fall through life out of control. Try to change these types of habits. Redirect your energy to a more constructive activity like exercise, spending time outdoors or with friends, getting involved in your church or synagogue or a club, etc.

Cut your spending on easy items like trips to the coffee shop, lottery tickets, magazines, movies, etc. If you saved $20 per day on these items, that’s an extra $600 this month! See how fast it adds up? Next, STOP using the credit cards! Put them aside in a cabinet some where out of easy reach and begin breaking the habit of reach for one every time you want something. If you do use one in a particular month, make sure you pay the entire expense you charged to it in addition to your regular payment. This helps to ensure your debt doesn’t grow any larger.

Begin saving money into a separate account like a savings or money market account where it can earn interest and will be less accessible to you. It is extremely important that you build this into your budget because you need to begin establishing an emergency fund. This will reduce your stress level because of the great psychological benefit to knowing the money is there, but only for a true EMERGENCY!

Develop a plan to pay off all non-mortgage debt. Please note we said pay off, not substitute with new debt such as an equity line on your home. The plan must require paying as much CASH from your regular income as you can on your debt each month. You should concentrate first on the accounts with the highest interest rates and take advantage of any transfer offers that will lower the overall amount of interest you are paying, but without increasing the total amount of debt. Celebrate your successes by enjoying an inexpensive treat each time you pay off an account in full. Most importantly, don’t start the cycle all over again. Pay off your credit card debt and then don’t charge anything new that you can’t pay off the same month. You will be thrilled when you see how much money you save in interest expenses you don’t have to pay anymore! Save for large purchases like an appliance.

Some people go through life thinking that the rich buy anything and everything they want any time they want. The reality is that America’s wealthy typically live quite frugally on these discretionary items we’ve talked about. They don’t spend vast sums on trendy clothes, new cars every year, or extravagant entertainment. Their secret has always been to use their money wisely, making sure that it is working hard for them in assets that will appreciate (like a home) and spending relatively small amounts on the other things. For more ideas on how the rich manage their money that are directly useful to you too, check out a book like The Millionaire Next Door. You’ll be pleasantly surprised to learn the power of saving your money and watching your spending.

We don’t pretend that the suggestions we’ve offered here to help you decide if your spending is in check or needs help and then how to improve it is an exhaustive list of everything possible. The specific guidelines might vary from one family to the next depending upon where they live or how many family members there are. The important thing is that we’ve given you a specific understanding of the ranges you should be spending in each area. Adjust it as you believe is appropriate, but maintain the overall concepts of monitoring your spending, living within your means, paying off your debts, and saving your money.

In no time, you will be addicted to a new way of life, one that ensures you actually have the cash you need to meet all of your needs, an emergency fund for those unexpected things life throws at us, and the incredible comfort you’ll feel in knowing you have money in the bank for your future!

Good luck!

J.R. Barrington is the owner of OnlineFinancialSolutions. The website offers many types of financial services including residential and commercial mortgages, auto and personal loans, credit cards, employment and business opportunities, insurance, credit and debt management services, and financing without a credit check. It also includes helpful articles that provide extensive information about these topics. For more information, visit http://onlinefinancialsolutions.vstore.ca

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