Tell me if you’ve ever heard this from a friend: a deep groan, followed by "I need to stop spending so much money". I know I've heard it from all my friends, and I've said it myself. Whether you spend on a weekend full of bars and restaurants, or a new pair of sneakers, money can disappear in the blink of an eye.
Cost of Living on the Rise
Even if you can resist those sneakers, anyone's spending can spiral out of control. Cost of living in urban areas is way up in the US. This article from the Huffington Post shows just how much income you need in major cities to be able to save 10-25%.
Spoiler alert: they're pretty high. In 2015, rents alone spiked by 8.3% in LA, and by 4.5% in San Francisco. Increases like that can spread anyone's budget pretty thin.
As the rents go up, salaries aren't following suit. People just aren’t making as much money as they were decades ago. According to the Economic Policy Institute, the average American household in 2011 earned $17,867 less in income than they did in 1979 (adjusted for inflation). That’s a huge gap in earning power, especially when more of your paycheck has to go to things like increasing rent.
While these figures are shocking, there is another Millennial trend that needs to be addressed. You’ve heard it before: Millennials spend on experiences, not things. Millennials are more likely to spend on things like travel, concerts, and meals out than previous generations. Millennials aren’t playing by the traditional rules. They want to feel that they’re really living life, not watching it pass by. They’re willing to spend disposable cash on those things that make them feel alive.
Enter overspending. Overspending can creep into your life in small ways. A dinner out there, a last minute concert there. When you’re spending in the name of enjoyment, what's the limit? There has to be one though - your money can only go so far. Overspending can lead to money anxiety. If you aren’t seeing the progress you want on your money goals, ask yourself the hard question: am I spending too much money?
Instead of wondering, you can know exactly how much you’re spending. Money is something that you should be in control of. Every dollar you spend should be a conscious decision, not a mindless habit. No need to let money fears or anxieties get the upper hand. No need to consider your money a mystery. With just a little bit of detective work, you can get exact numbers on your spending habits.
Am I Spending Too Much?
To figure out if you’re spending too much money, let’s back it up for a second. We’ll go the big picture route to figure this thing out. Below are three questions to ask yourself. Give yourself honest answers and you’ll take back control over your money.
1. How Much Money Do You Have?
First things first: you’ve got to know what exactly you’re working with. Da Vinci didn’t paint the Mona Lisa by not knowing his subject. He was in love with that woman, and knew every curve of her face when he created that painting. So it’s time for you to get up close and personal with your money.
Figure out how much money you take home each month, and how much you have tucked away in various accounts. If you’re a W2 employee who collects a paycheck twice a month, total how much that comes to. Take a look at any savings or retirement accounts you have. To get your net worth, add up all the money you have, and deduct all the debt you have. It’s ok if the number is negative - most people with mortgages or big student loans will have a negative number early on in their career.
Organize your money by having a checking account and two savings accounts. One should be your emergency fund. Your e-fund is there for a rainy day only, and not to be touched otherwise. Your other savings account can be money you pull from for a fun expense, or a bi-annual payment. Your retirement funds are off limits!
Once you know exactly what you’re working with, things get a lot simpler. If you’ve been giving in to champagne taste but earning a beer budget, now you know! It can be hard to face the numbers. It’s so necessary though. This is the single most important step you can take to getting your finances under control. Give yourself a pat on the back for doing the hardest part already.
2. How Much Do I Need to Live On?
Next up: add up all your monthly expenses. If you haven’t been tracking them and have no idea how much you spend on say, food, each month, that's ok. You’ve just found yourself a fun new project. Take a month and track everything you spend. You can use an app like Mint or You Need a Budget to track your spending and see all your accounts in one place. That can be credit cards, retirement accounts, checking/saving accounts.
Write down every little thing that you spend money on. Apps will track your credit card spending, but you’ll have to manually input cash transactions. This step is the second most important because it shows you the reality of your situation. You'll be able to see where you overspend, and where you're already doing well. If you budget $100 for gas every month, but you’re really spending double, this month will show that. If you think your bar tabs might be outrageous, but you're only less than you planned on alcohol, you're doing ok.
One month of tracking your spending can change your entire life moving forward. That sounds like something a televangelist would say, but it’s true! Once you have the data you can figure out the following questions. What's your biggest expense? What's your smallest expense? What are the extras that are adding up? Where can I cut back?
I’m a little embarrassed to say that one summer, over the course of two months, I spent at least $30 on Twix candy bars. I would walk to the grocery store three-five times a week to pick up one or two things, and I always threw a Twix on at the counter. (They’re my favorite!) Well, they cost $0.78 a pop, and after two months of 3-5x a week purchases, that really adds up.
I had no idea I was spending so much money on terrible candy before I sat down and tracked my expenses. I was downright humbled by the amount I spent on candy. Without tracking my expenses though, I never would have guessed. Without tracking my expenses, I’d probably still be spending an outrageous amount on Twix!
3. What are My Money Goals?
This is a big question. I mean, deep down, what do you want to do with your money? Do you want to save for a house, go back to school, travel to Asia? I know your goal isn’t to set the record for eating the most Twix in a two month period.
Your spending today affects your goals tomorrow. In the same way that you’re not going to be able to run a marathon without training, you’re not going to reach your money goals without saving first.
Knowing what your goals are means that you can put a price tag on them. Let’s say you want to go back for your Master’s degree. Your portion of the tuition will be $30,000 a year. A two-year program will set you back $60,000, plus living expenses. With that number in mind, you can start to save your money for that exact purpose, and stop when you hit your goal.
Knowledge is Power
With all this new information, setting up a new budget is going to be much easier. Since you know how much you spend in all areas of your life, you know where to cut back to reach your goal. Say your biggest expense is housing. You can find a new apartment or get a roommate to cover the cost. Instead of hitting the bars every week, have friends come over with a bottle each. You can still ball hard, but the price tag will be much lower.
Let’s get rid of that old chestnut "I need to stop spending money." It’s time for a new mantra. "I control my money" sounds good to me. Control your money by taking actionable steps. Understand your income, track your spending, reduce your expenses. All these things will lead you to accomplishing your money goals. Don’t stand in your own way any longer. Stop spending your money, and start living your life.