A lot of Behavioural Science, and Behavioural Economics and Behavioural Finance are just as guilty of this. go on and on about theoretical frameworks, modelling behaviours and doing longtudinal or just big statistical analyses to come to a conclusion about certain behaviours. Whether they occur or not. Whether they have positive or negative impacts on individuals, households or society as a whole. Whether the behaviour can and should be resolved. Sometimes it just drags on...
But at other times, we know a behaviour is happening. We know it's bad. We know it needs to be solved. It needs to be solved NOW. But how?
One of the most chronically returning problems that people seem to have when managing their finances is that they don't seem to budget them right. Meaning, there is too much month left at the end of their money. And this always just leads to the victim (and at the same time perpetrator) to exclaim: "I need to spend less!" Before they continue doing exactly the same as they were doing before, not spending less at all, and getting to that same point just a month later. In this article I'll give you 6 steps that will make sure you end up spending less. Let's get into it!
Track Yourself Before You Wreck Yourself Install a spending tracker app. For the love of God. Suddenly you will see how much money you end up spending on coffees, eating out, make-up, shoes, subscriptions you no longer use etc. This step is vital. Why? Because of all of the financial clutter we have amassed on our bank statements. If you check your bank statement you'll see what I mean. Or just open your banking app. It's cluttered. Small expenditures everywhere. There is no order to the madness. It provides you with absolutely no overview. If it didn't state your balance in the top corner, you'd have a very hard time figuring out how much money you'd still have left to spend, and there lies the issue. If you tend to live of cash this step is going to be rather more difficult, as there's no app that tracks where your cash is going. However, you can track down your expenditures yourself by writing them down in a notebook, or noting them down on your phone. The outcome will be the same. Luckily enough for you, people who tend to use cash as their main method of payment tend to spend less compared to their card-using peers. So at least you've got that going for you!
Re-prioritise
Once you know how bad the situation is (and it's bad, you had no clue you were spending THIS MUCH on coffees a month), you can re-prioritise: if you want to have more money left, this is the new priority. And having Starbucks (or Costa...) coffee will now be of a (much) lower priority. For every expenditure that you have found in step 1, you are going to have to ask yourself whether it is of higher priority than your new goal. For every expenditure you have to ask yourself: Do I really need this? Can I not live without this? Is having this better than having an extra ....$ left at the end of the month? You will have to do this for every single expenditure. Do you need a gymsubscription? Sure. But do you need it when it costs 40 pounds a month and you only twice a month? No... Cancel. Next. It's a rough process, and it's best done with a supportive, but stubborn friend who gives you some serious tough love about your financial decision-making. And a bottle of wine (or something stronger) afterwards to help you dull the pain. Because this is going to be painful. Another important part of re-prioritising that will curb your spending is to figure out what you actually need. We often spend because we think we need something. But do we? Diving into the next point will help clarify that question.
Shop your Stash Have you ever bought something you thought you needed, to later realise you had something similar already at home? Yeah, me too. As I said before, it's difficult to keep track of our money and of our bank balance. It's just as difficult to keep track of our current possessions, if not harder. Sometimes things are impossible to find, sometimes we no longer like things and get rid of them, and forget about having gotten rid of it, and then frantically searching for it and missing it. Now the easiest way to figure out what you already have is to go through it all. Yes, it's time to get some Marie Kondo action. If you don't know who Marie Kondo is, she is a tiny Japanese woman, who appears very gentle, but is ruthless when it comes to cleaning out houses. She doesn't do the cleaning for you, no you have to do that yourself, but she'll explain the theory behind it. Well, her translator does. She is a phenomenon and a force to be reckoned with, especially if you are a hoarder. Now back to step 3. Go through your closet, see what you have, take out what you no longer want/need/like and put it in a different stash. Do this for your clothes, crockery, cleaning supplies, office supplies, books, technology, etc. Until it's all done. Now nicely put back everything you still want, and then look at the list of things you said you still needed. Can some of the things you wanted to initially get rid of take that function? Ugly but comfortable shoes can be repurposed for walking or working out. Old jeans can be turned into shorts for the summer. Shirts can be turned into pillowcases, cleaning towels, fabric bags etc. Old pans and jars can be painted and used for home decor, no need to run to IKEA. And worst case scenario you can sell things (make a bit of extra money), bring it to a swap event (trade your stuff for other people's stuff, which should be free) or donate it and make someone else in a less fortunate position happy. Now besides this enabling you to have more space in your living environment and a better idea of what you already own, it will stop you from buying more things as well. Why? Because you now know how much you own. And if you've just gone through an overwhelming amount stuff, chances are you don't want to add to it. This becomes especially prevalent when you have to move. Suddenly you just no longer want to drag everything with you.
Leave home without it
There is a paper by Prelec and Simester (2001) that is called: "Always leave home without it: A further investigation of the credit-card effect on willingness to pay." This entire paper focusses on the fact that the mere presence of a credit card is likely to cause you to spend, and to spend more. So their solution? Don't bring it with you.
It's 2019 (and soon 2020), we've got a vast amount of payment methods to choose from. But if I may give you some advice: if you want to limit your spending, use a method that has a limit. Stick with cash. Leave the cards at home.
Now some people are a bit uneasy with the idea of not having their card (or mobile/digital wallet) with them. Bear with, what I'm proposing is already a very lenient version. The original idea is to not have any money with you at all. But, because things do happen, having a bit of cash on you, just in case, can't hurt. As long as you don't spend it on takeway coffee...
It's an interesting thing to think about: the limit that cash poses. Once you're out of cash, you can't continue spending. You can't go into overdraft or into credit, because that's just not how a cash note works. Thankfully.
Cash is an easy way of cutting yourself off. It also takes away the need to constantly track the spending in your head. Imagine being on a night out, on a budget. You only want to spend $30 (and you need to make sure you don't spend more, because rent is due soon and you'd like a roof over your head). Especially when drunk (or just slightly intoxicated) those initial plans you made will fly out of the window. If you continue paying by card, chances are, you will continue paying, not stopping at your self-imposed limit. If you only take $30 in cash with you, and nothing else, you can't cross the limit. You don't even have to think about it, you just can't.
Leave the cards at home, and stick with cash.
Don't enter the Temple(s) of Doom
If you've got money on the mind, especially focussing on not spending it, you're essentially constantly thinking of money and spending. This is a recipe for disaster. Having this restriction put on you (by yourself) will have the same effect as if you had put yourself on a diet: now you're constantly thinking about unhealthy food (brownie anyone?). For a "financial diet" the outcome is to think constantly about the many things you'd like to buy. Now shopping your stash and not taking money with you will help with this. You can go into stores, but with no money on you, shopping will suddenly become a lot more difficult. But there is of course the issue with being at home. Where you keep all your payment methods. And where your laptop is with a connection to the online world. The online world of shopping.
You can see where I'm going with this. You've been doing well so far with your finances (or work, diet, working out or whatever) and want to treat yourself. Or, you've been doing really shit at any of the aforementioned (or all of them) and want to console yourself. You turn to online shopping. And this is where it all goes horribly wrong. Now, there are two ways to avoid this: you rely on your own willpower (good luck...) or you start blocking certain sites. It's like a "kids lock" but for yourself. If you can't get on it, you can't spend your money.
Fail to Plan, Plan to Fail
Now sometimes you will have to go to a store, online or offline. You are going to at least need groceries. But you will go in being fully prepared with what you are going to buy.
You will have a list of things you need. You will only go to the isles and stands where these products are being kept and your new mantra will be: get in, get it and get out. Anything else is not acceptable.
If it's not about groceries but about rather more frivolous spending, you should still put it on a list. Call it the long-term list. This list you have to edit every month. So, every month you have to decide whether you still want the item that's on the list. If you still do after a certain amount of time AND your finances allow for it, go buy it. But you might have found out that once the impulse and the idea of the "immediate pleasure" has faded, you don't really want it that much anymore. That's the power of procrastination. It works for homework, and it even works for shopping!
Some of the six steps outlined above will immediately cut down your spending. Other steps will aim at reducing the habit of spending itself. Together, they will ensure you lead a more financially stable and healthy life, and feel more in control over your money.
If you're going to try these tips, or if you have other things that worked for you, please let me know on twitter, @MoneyMindMerle. Happy saving!
