Try this.
Raise your hand if you’ve ever felt like you’re spending too much money. We all have, from time to time. People enjoy spending money – there are actually measurable biological responses to swiping your card, ranging from elation and celebration to guilt and despair. If you’re experiencing more of the latter, let’s figure out how to get you back on track.
A budget is often considered a cornerstone of any financial plan. It’s designed to put guardrails around your spending, particularly on things you don’t need to spend money on. And there are a million budgeting apps out there to assist with these guardrails. Expensive clothes, new kicks you don’t need, a car you can’t afford, even your daily Starby’s habit – a budget is supposed to deter you from blowing money on all these things.
But what if you’ve created a budget and still can’t stick to it? This quickly brings on a cycle of overspending, guilt, and negativity. Yikes.
Successful personal finance has as much to do with the dollars and cents as it does with managing the emotions attached to money. Sometimes you need to break the spend/guilt/repeat cycle by creating a positive relationship with money. Sounds great, but how?
By developing a “savings plan”. A savings plan turns a budget on its head by focusing entirely on how much you’re saving versus how much you’re spending. There’s a psychological trick that occurs when we take the focus off worrying over every little penny spent and instead focus on hitting a savings goal – regardless of where the remainder of your money is spent. It may seem like semantics, but this approach will create a positive emotional response to spending money. This is because you’re rewarding yourself for a job well done saving what you told yourself you’d save!
Here’s a few simple steps to implementing your savings plan:
- Make sure you have a bank account where your savings can go. We recommend savings accounts that pay interest… cause why not earn a little cash on your cash.
- Calculate how much you can save each month. Start by adding up your monthly paychecks and subtracting the total of your required monthly expenses (these are things you MUST pay for like rent or mortgage, car payment, cellphone bill, utility bill, etc.).
- The number left over from your monthly paychecks minus expenses is how much you can potentially save each month. If this is a negative number, FIRST figure out how to make it positive, whether that means cutting expenses or getting a second job.
- Come up with an amount to serve as your monthly savings goal. Make this number realistic, attainable, and something you know you can do. Start low and increase your savings goal over a few months while you get comfortable with the process.
- Figure out how often you’d like to transfer your savings amount to your savings account. Some people prefer weekly transfers, some prefer biweekly to sync with paychecks, and some prefer monthly.
- Do a little math. Divide your total monthly savings number (from step 4) by the number of times you plan to transfer your savings each month (from step 5).
- PAY YOURSELF FIRST. This means, before you spend any money on something that isn’t required, transfer your savings amount to your savings account.
Let’s walk through an example. Say Maria makes $4,000 a month from her paychecks. Her monthly expenses include the following:
- $1,200 rent
- $150 a month in utility bills (average)
- $350 car payment
- $75 cellphone bill
- $150 student loan payment
- $50 credit card payment
- $275 health insurance
- $500 groceries and personal care (average)
- Total is $2,750 a month
This means Maria should have about $1,250 per month free to save and spend, because $4,000 minus $2,750 = $1,250.
Maria decides she’ll start with a savings goal of $500 a month. She gets paid every two weeks, so her savings plan would be:
- Make $2,000 every two weeks in paychecks
- Expenses every two weeks are $1,375 (or $2,750 divided by 2)
- Transfer $250 every two weeks to her savings account (the math is $500 per month divided by 2 transfers per month, or 1 every two weeks = $250 every two weeks)
- Spend the remaining $375 wherever and however she prefers over those first two weeks, then repeat over the next two weeks
That last step is the beauty of a savings plan – Maria is free to spend the leftover money however she likes! This is what creates that positive relationship with spending. Notice what’s NOT included in the required monthly expenses – TV subscriptions, clothing, entertainment, drinks at the bar, shopping. That’s because these are not things you must pay for each month, but rather things that you want to pay for. This is where the savings plan comes in so clutch because by paying yourself first, you force yourself to decide how you’ll spend the rest of the money left over. TV subscriptions costing you $50 a month? That’s fine, you earned it by paying yourself first, but that might force you to have less to spend on drinks and dinner. Spent $100 at the bar last night? Totally fine, just know that you may not be able to do that again until you’ve paid yourself first in the next savings cycle.
If a savings plan sounds better and easier than a budget, that’s because it is. Now go enjoy the financial freedom of your savings plan and save, save, save!
For lots more on how to crush the personal finance game and find early retirement, make Firreo your financial advisor. We’ll help you out of your job and on your way to financial freedom!