If you want to get a handle on your finances, it's important to review your spending habits. Here are 5 things to look out for while you're doing that. By identifying these issues, you can make changes to save money and improve your financial situation.
Our salary doesn't last until the end of the month. It is a common situation that everyone faces nowadays. We have to track our spending to get an accurate picture of where our money is going.
After reviewing our budget, we can easily eliminate any unnecessary expenditures. It may take some time to develop wise, positive spending habits, but the rewards are numerous. There are some habits like eating out frequently, overspending on clothing, or luxury buying, which may drain our budget.
Once we’ve determined which habits are consuming a large portion of our income, we can decide whether or not these habits are truly necessary.
So, here are the things which we should look for while reviewing our spending habits:
1. Reviewing of debt:
We may hamper our savings if debt piles up. If you already have debt, it’s better to pay it off before making any investment. For that, make a list of all the debts, like credit card bills, loans, or any down payments.
Now, add up all the debts and check how much you have to pay. Look which of the debts should be paid first –these are known as priority debts. It is suggested to concentrate on paying off the highest-interest debt first, then move on to the next highest.
One of the most effective methods for getting out of debt is debt consolidation. This means we can take out a new, lower-cost Personal Loan to pay off some of our outstanding debts.
2. Avoid overspending:
Overspending can lead to debt problems that take years to resolve. Overspending is easy to do when we don't budget or buy on impulse. Here are some solutions to avoid the overspending habit:
· Make sure to leave credit cards at home, whenever stepping out of the house.
· Try to strike a balance between wants and needs.
· Make it a habit to wait 24-48 hours before purchasing anything.
· Don't save credit card information online to avoid unnecessary buying.
· Make a list of items you need and while buying, stick to it.
3. Create a budget:
To create a budget, we should first make a list of all our income and expenses. Make a list of monthly earnings from each source of income. And then, create a list of all the expenses i.e., fixed and variable. Finally, take the difference between both the amount and check how much you are left with.
I use the 50-30-20 rule for budgeting. So, this technique helps to figure out my needs, wants and savings. The rule states that 50% of the monthly spending should be set aside for needs, 30% for wants, and the remaining 20% for investing or debt repayment.
4. Using expense-tracking apps:
Keeping track of our daily spending with pen and paper or an Excel spreadsheet appears to be a daunting task. But thanks to the digital age, we can now do everything at our fingertips.
There are numerous expense-tracking apps available that make the process much easier. These apps provide me with useful finance templates and categories, allowing me to begin entering my expenses right away. This can greatly assist me with my budgeting.
In some apps, I have to manually enter expenses, while in others the information is automatically taken from linked credit and bank statements. With these apps, I can categorize my spending and generate expense reports to better understand my purchasing habits.
5. Build an emergency fund:
An emergency fund is like our saviour in case of any unexpected expenses. It is a necessity that everyone should follow. It is recommended that the emergency fund should be stocked up with three to six months' worth of our household expenses. To park the emergency fund, we need safe and liquid options to ensure that our money is available whenever we need it.
So, the two main investment options are money market instruments and liquid funds. It’s easy to set up an automatic monthly transfer from our bank account to the different short-term investing options.
Tips to improve our Spending Habits
1. Start investing: To build wealth in the long term, we need to have a habit of investing. There are various options available to invest our money like equity, mutual funds, bonds, etc. We don't need a large sum of money to begin investing. It is possible to just start a SIP in mutual funds for as low as ₹500 a month.
These small investments will yield large returns in a few years. It’s better to always conduct our research and never rely solely on the advice of others, as capital markets are fraught with risks.
2. Review spending annually: We need to examine our spending habits at the end of each year. Pull out the snapshot of the bank account details to review your transactions. This yearly assessment will keep us on track with your goals. The most common mistake people make is focusing solely on their large expenditures and failing to account for their small daily expenses.
You never know when small amounts of spending can lead to a significant amount at the end of the month. We must examine where have we spent all our money to ensure that it has only been spent on necessities.
3. Create a financial plan: To achieve our goals, we need to work on them. Spend some time setting financial objectives for ourselves. Break the goals into the short-term and long-term to achieve them faster.
For example, short-term goals include a vacation or any nearby down payment. While long-term goals can be children’s education or buying a house. Create a clear road map to fulfil all the desired goals and start saving for that.
We must change habits that are impeding our success and cultivate new habits that will allow us to effect long-term change. Our spending habits decide money’s success, so try to stick to the budget and make sure to save wisely to achieve future goals.