Dearest friends, I have a confession to make: I, Katasha Kay, have a serious spending problem. Not only have I failed to meet my target savings rate for two months in a row, but the little money I did manage to save has been completely annihilated. The worst part? Unless I manage to scrape up an extra $1,666, I will have already failed one of my 2016 Financial Goals after only two months in the entire year. Ouch.
Now if I were ballin’ like Lebron this wouldn’t be a big deal, but the unfortunate reality is that I can’t afford to be sloppy with my savings. Without a sizable emergency fund, I’m essentially living paycheck to paycheck and completely vulnerable to unexpected setbacks like healthcare expenses or (God forbid) a job loss. More than that, if I don’t learn how to manage what little money I have now, I’ll never gain the skills and discipline needed to become financially independent.
If I’m going to master money, and master it well enough to help others, I’ll have to get serious about keeping my spending under control. With this in mind, here’s a 5-step program I created that should help me cut spending and meet my monthly savings goals:
Step 1: Automation
I actually learned this one through experience. Back when I was a diligent saver and used Betterment to stash my cash, I set up an automatic deposit to pull $650 from my bank account each month on the 16th (i.e. the day after payday).
The genius of this move was three-fold: first, because the automatic deposit was so close to payday, it was hard for me to “miss” money that felt like it was hardly there in the first place. Second, because I knew $650 would be pulled from my account each month, I mentally self-adjusted my spending to avoid overdrafts. And, because transfers between accounts were non-instantaneous, if I really felt like spending the money, I had to wait 5-6 days for each transfer to clear. Usually by that time, whatever I originally wanted to purchase had already become irrelevant.
Because automation has already proven to be effective at keeping me from overspending, my plan is to restart the monthly deposit, but this time – instead of Betterment – I’ll use my Barclays Dream account. After the new year’s rough start in the stock market, I now understand the importance of keeping my money in a safe and reliable savings account. Once my emergency fund reaches $25,000, I’ll continue my adventures in investing.
Step 2: “Blow Money” Budget
I got this one from His & Her Money. Basically, when setting a monthly budget, the important thing is to make sure you have enough money set aside for guilt-free spending while still meeting your basic needs and hitting your target savings rate. If you don’t, you run the risk of feeling money deprived and later “binge” spending at the next opportunity. (Trust me, it’s true and it has happened too many times to count.)
Just like a good dieter allows room for a dark chocolate dessert every now and then, a recovering broke girl needs a little room for blow money. Currently, my blow money budget is set to $209/month.
Step 3: Cash, Cash, Cash
You can thank the Dave Ramsey fan club on YouTube for this one. In the Ramsey world of personal finance, cash is king which means all purchases should be paid with real, paper dollars whenever possible. When spending with a credit or debit card, the easy convenience typically makes people overspend without a thought towards their budget. On the other hand, using cold, hard cash will tend to keep impulse spending in check.
If you search “Cash Envelope System” on YouTube, you’ll find tons of videos of people dividing their monthly budget into envelopes for groceries, household items, fun money, and a whole bunch more. I wouldn’t say the cash system is 100 percent foolproof (there have been times where I’ve spent beyond my budget, even with cash), but seeing the physical, tangible limit of my funds has definitely helped me become more mindful. Which, by the way, leads me to…
Step 4: Mindful Spending
This idea came from reading, Your Money or Your Life, which is one of my absolute favorite books on personal finance right now. To become a mindful spender, there are three steps to follow: first, you need to find out how much money an hour of your life is worth. To do this, determine your true wage by calculating hourly wages and subtracting any work-related items like work clothes, gas, daycare, commute time, and all other time or money expenditures you wouldn’t have if you weren’t working. (For details, Paula Pant explains this concept in depth here.)
Next, once you know how much an hour of your life is worth, begin a daily record of every single financial transaction while translating that money into hours of your life. For example, although my hourly wage is $19.23/hour, my true wage is about $10/hour because of taxes, and all the time I spend commuting and prepping for work. If I were to buy a $10 sandwich during my lunch hour, I would have spent an entire hour of my life working just to get that sandwich.
Finally, at the end of the day, review each item you purchased and ask yourself, “Did I spend according to my values?” If you did, put a check mark and continue. If you didn’t, put an “X” mark and continue. The beauty of mindfulness is that there’s no shame or blame in your actions, only awareness.
I haven’t done this step before, but according to the book’s author, people who follow this mindfulness spending program for 90 days typically see a 20 percent reduction in spending on average. Pretty cool, in my opinion!
Step 5: Accountability
Here’s where things start to get a little bit more fun. As I’ve said before in an earlier post, it’s not enough to have a plan; to be successful, you also need to make a public commitment and report weekly progress. Since I’ve already demonstrated that written weekly posts aren’t practical for me (just look at my sporadic blog post dates), I’ve created a YouTube channel so I can report my progress through video.
Each week on #MoneyMonday, I’ll post a video reviewing my progress in saving money and reducing spending. Hopefully, by making my accountability uber-public, I’ll make a lot of progress and get a lot closer to achieving my goals.
Well that’s it, everyone – please wish me good luck and I look forward to seeing you next time for my first #MoneyMonday video!