By James Kinney
Learn more about James on NerdWallet’s Ask an Advisor
Ever find yourself scratching your head at the end of the month, wondering where all the money went? You’re not alone. Even many high-income earners find themselves living well beyond their means, unsure of where the money went. They may have an uneasy feeling that their spending has spun out of control and taken on a life of its own.
Part of the problem is that spending is a very different experience than it used to be. Electronic payments have separated us from our money.
We no longer see our money — we can’t feel it. The spending constraints imposed by a lack of physical cash in our wallet no longer exist. We’re never out of money as long as we have plastic in our wallets. We don’t even have to go to a store to spend money on things we don’t need, thanks to the Internet.
The result is that many people feel as if their money (or lack of it) is controlling them, rather than the other way around.
It doesn’t have to be this way. You can regain control over your money, start living within your means and better align your spending with your priorities — if you put into place a system that gets you back in touch with your money.
Find out where the money goes
First off, track your spending. Most people have no idea exactly where their money goes. They buy what they want or need when they want or need it, and they pay the bills at the end of the month. Whatever is left over (usually not much) goes into savings. If there isn’t quite enough, maybe they let the credit card balance roll over — just this once, of course!
The good news is that while technology makes it easy to spend, it also makes it easy to track what we spend. Just use a budgeting app like Mint or You Need A Budget. (Technophobes can do it with a pencil and ledger book. Save receipts and write down each day’s purchases, with a separate column for each category.)
Whatever system you use, track your spending for several months. You may be surprised by what you find. This takes some time and discipline — but if you don’t know where the money is going, the next steps will be very difficult.
Set up separate accounts
Set up a bank account exclusively for those bills that get paid every month and are the same (or about the same) every month. Then deposit enough money from each paycheck into this account to cover these expenses, and pay them from the account. Such expenses include: rent or mortgage; car payments; insurance; taxes; utilities (sign up for level billing if available); designated savings, such as for retirement or college; and other fixed, non-discretionary expenses. You should have no debit-card or cash access to this account. It is used for nothing but those fixed non-discretionary expenses.
The rest of your money gets divided into two additional accounts. One is the spending account. This is your transactional account and is used for groceries, eating out, entertainment, clothing, laundry, gas, minor car repairs and other discretionary spending. How much goes in this account will be determined in part by what you learned from tracking your spending and partly by what is left over after funding the other two accounts. This is the only account that should have a debit card associated with it.
The third account is your “occasional big ticket expense” account. Money you put here is saved for big once-in-a while expenses such as vacations, home repairs, medical bills or major car repairs. Think carefully about how much money you will need to fund this account. Because the nature of these expenses can be unpredictable, you will want to contribute a little extra at first to build up a financial cushion, then you can cut back. When it is time to spend this money, transfer the funds to the spending account.
Live within your means
Now for the hard part: discipline.
All purchases under this system should be made by debit card, check, or direct payment from the appropriate account. Stop using credit cards altogether. Make sure your debit cards are set up to reject a transaction if there is not enough money in the account to cover the purchase. When the money runs out, you wait for the next cash infusion before doing more discretionary spending. If you haven’t accumulated enough in the big-ticket account to take the vacation you’ve been dreaming about, then choose a less expensive destination.
This system helps put you back in touch with your money. After the first time your debit card is rejected, you will learn to check the bank balance before you buy groceries. If funds are running low, you will learn to bypass those steaks and pick up hamburger. If you know eating out means no money for gas in the car next week, maybe you will decide to put together a gourmet feast at home instead. If you know that buying a new car with a $350 payment means there will be $350 less in your discretionary budget every month, maybe you’ll decide that the old clunker has a few more months left in it.
Change your thinking
Perhaps the single most important thing you can do to keep your budget on track is to develop and nurture a healthier attitude toward money. Feelings of deprivation often drive people to buy things they do not need. Change your thinking. When you choose not to buy something, you are not denying yourself — you are simply choosing a different purpose for your money.
I don’t drive a 10-year-old car with 150,000 miles on it because I like old cars with scratched paint. In fact, I admire my neighbor’s new convertible sports car — and I know I could buy one for myself if I chose. Instead, I decide that I would rather help my son pay for college and build up my retirement account. That is my choice, those are my priorities. I don’t feel deprived. Rather, I find comfort in the knowledge that I am in control of my money and am spending it in a way that is consistent with my values, goals and priorities.
Image via iStock.