Do you overspend when you shop? Or, you find yourself spending and wondering what you used the money for?
There will always be needs we consider necessary and legitimate expenditures. But are your expenses necessary?
I know of people, who insist that all their expenditures are necessary purchases that just have to be made. Even when they end up spending what they have to the last dime.
This may seem like asking so what should we do? We have all these needs but the funds don’t stretch far enough?
Adopting that mindset means you are constantly going to live on the edge with your finances popping up and down, typically known as living from paycheck to paycheck.
Living from paycheck to paycheck
According to CNB C, 63% of Americans have been living from paycheck to paycheck since Covid 19, with little or no savings at the end of it all. The pandemic has had a similar impact on household income worldwide.
Most people view all their proposed purchases as necessities. When you prioritize you will see that your purchases are not always as important as we make them. If they are not all necessary purchases, how do know which of them to focus on to avoid over-spending?
I have noticed that no matter how much you earn when you receive a raise, your “necessary” expenses seem to rise in the same proportion. That is because you now want to buy all the things you could not afford.
You also acquire tastes for the finer things of life as you get wealthier. So, where do you draw the line? How do you control excessive spending so you do not run into financial distress?
Many times you spend all the money on things that are not as important as what you might need money later for.
Then, when you realize that more important necessities that might require that money have cropped up, you would have exhausted the funds.
So, how do you know which expenditure to allocate your funds and when to buy?
To make this decision easier, I suggest you group your expense items into 4 categories that will assist you to determine how best to expense your income.
This will help you categorize your proposed expenditure in the level of importance and urgency.
To apply this approach you may have to keep in mind the following considerations;
- There will always be necessities vying for your money.
- What you consider necessities might be Wants, not Needs.
- Certain purchases can be deferred.
- Heavy repayments can be negotiated.
- Large payments could be spread over a period.
- Purchases dictated by impulse do not make it important.
- Delayed gratification reduces unnecessary expenditure.
My suggested decision-making approach when making expenses to avoid overspending is to create 4 categories, as stated before, to determine the level of importance and timing of these expenditures.
Reducing expenses is a key component in your journey to financial freedom.
CATEGORY 1 – Important & Urgent
An expense that is both important and urgent requires immediate action to ensure its payment.
Such expenses are usually vital to the well-being of the spender. This expense comes with an urgency that requires an immediate response to avoid unpleasant consequences.
In this category, you consider medical expenses for either you or a loved one. Emergencies also fall into this category especially if they are life-threatening.
Here you have to be careful what you consider an emergency. For instance, you could be at the scene of an accident as the first witness and you have to take a critical decision to save the lives of people you might not know. Humanity now comes to play.
The outcome might not affect you directly. Knowing you could take those concerned to the hospital, payout money you might ill afford but save lives qualifies as important and urgent.
It might throw you off your budget but also give you the satisfaction of doing the right thing.
Other expenses that qualify as important and urgent are due payments that can cause unpleasant outcomes if not paid such as tuition, debt repayment, tax, etc.
CATEGORY 2 – Important not Urgent
Important but not urgent expenses are those that are necessary for daily living but can be purchased at any time without causing any major upheaval in your life such as grocery shopping.
Food is important for survival. Not just food but the right kind of food that makes for a healthy life. Your choice of food depends on your family’s needs and the dietary requirements of your family members as determined by their ages.
Housing, clothing, and car purchases fall into this category. Very important also is the purchase of assets that appreciate over time such as real estate, stocks, and bonds.
Protective assets like insurance and annuities. Also, putting aside money for investment is key. When you earn money, you keep a part to grow more money through savings and investments.
Don’t think making investments requires you to be super-rich before you can make them. Not at all, because there are various ways you can take advantage of investment opportunities through fractional investment apps where you can purchase investment units for as low as $10 or less.
You can join Invstr to start fractional investing and Acorn for savings.
Spending all your money on needs is like a farmer that consumed the whole harvest without keeping some of the seeds for planting.
CATEGORY 3 – Urgent, not Important
When the need to purchase seems very urgent, you need to pause and make sure you’re not purchasing on impulse.
Buying on impulse is one sure way of overspending because the purchase is psychological, not driven by a real need.
In such situations force yourself to pause and think, “Do I need this?” That stop alone can save you a significant amount of money.
Allow the feeling of urgency to pass then assess the need to make that purchase. You might even have recurring expenses that you consider important or urgent but a careful analysis might reveal to you that you can live without them.
Items in this category could be cable subscriptions or other subscriptions that don’t impact your well-being but that you are religiously paying for.
However, there are exceptions to this rule, for instance, when you meet someone in need. Please step in and help.
Your money might be the only intervention that person might need then. It might not be important to you but the urgency of the human need requires that you step in and help, no matter how small. It could make the difference.
CATEGORY 4 – Not Urgent & Not Important
When a purchase is not urgent or important then there is no basis for making it. Although some purchases, which fall in this category could receive some consideration because of their emotional value.
One such expense could be sweet bakery treats that can satisfy the need to treat yourself or your children once in a while.
It could also be a family outing that is undertaken because of its emotional value may be in a situation where you choose to eat out.
Life does not have to be regimented. Once in a while, you have treats now and then to add color to your life.
But they should be budgeted for and the amount should not be exceeded. To judiciously allocate your funds so you don’t lack read my post, How To Allocate Your Money To Each Category.
Also, find out if you are good with money by taking this financial quiz.
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