How To Slay The Spending Money Ogre Part 1
Have you ever heard someone complain "I don't know where my money went!"
Do they often follow this statement with something like "I can't pay my bills!"
These feelings are the result of a problem that is all too common. We'll take a look at a prevalent contributing cause here. Then, in Part 2, we'll look at a very easy solution for getting control of this problematic aspect of your household finances that you can start doing today.
It's So Simple ... Right?When people enter the workforce they typically have the goal of getting a paycheck. When, as is usually the case, they have no idea how to effectively manage the money they earn, the receipt of a paycheck becomes the default trigger that drives their day-to-day financial cycle. I call this the Trigger Model.
- Get paid.
- Pay the bills that are due.
- Use what's left for spending money until next payday.
What's The Problem?So why is something that sounds so simple a problem?
First, in the Trigger Model the amount of the bills being paid determines the amount of spending money. This results in an inconsistent, or roller coaster level of available cash between paychecks. One payday there's lots. Next payday, not so much.
Second, by its very nature, spending money gets spent. And the spending tends to be done unconsciously especially when credit cards, debit cards or a smart phone app are the payment methods being used. When it's gone the spender has very little idea of where the money went.
Third, when entire paychecks are spent between paydays, each paycheck has to be enough to last until the next paycheck. When a paycheck doesn't stretch far enough, credit cards and consumer loans are often used to fill the gaps. Living paycheck to paycheck pretty much guarantees a growing debt load.
What's The Solution?How do you stop the roller coaster spending and the resulting increase in debt? Where to start may surprise you.
When first trying to get control of finances, bill payments are normally not the best place to start. It can take a long time to significantly lower obligations. Changing how spending money is managed, however, can be done today. And gaining control over spending money will have a positive, almost magical, effect on household finances.
After spending money is under control, you can begin to look at other aspects of your day-to-day finances such as lowering obligations, managing credit cards, plus setting aside funds for large purchases and building savings.
Where To BeginThe first step toward bringing spending money under control is deciding what you mean by spending money. This is a two part question. In addition to what you purchase, how you buy things is equally important. For this discussion, I'm assuming that you use cash for spending money. Using either a debit or credit card, or an app on your smart phone may be convenient, but, using any of those payment methods can unnecessarily complicate a very important part of controlling spending money. Namely, how much has been spent and, thereby, how much is left to spend. Cash may be old school, but, it's still accepted just about everywhere. And, more importantly, while you may be giving up a convenience, by using cash for spending money you stand to gain more benefit from your income (BFI).
If you aren't clear on what comprises your out of pocket expenses, take the time to track your daily spending for a full month. Write down every purchase you make in a spending money log. Keep track of every penny spent. Purchases included might be gas, lunches, espressos, groceries, parking meters, movies, a pack of gum, etc. All the things you buy as you go about each day. Major purchases and paying bills are not included.