Having money can provide us with the freedom to live our lives the way we choose. Once we determine what makes us happy, we can then design our money to support our personal goals.
This post gives tips for reducing expenses. As you reduce your expenses, recognize that the items we spend money on can all be categorized as either a “need” or a “want.” Buying groceries for the week is a “need,” but going to a movie or out to dinner is a “want.” Paying the mortgage and the utility bill are both definitely a “need.” A “want” may be the deluxe cable TV package that costs far too much, or the clothes that you buy each month.
Becoming aware that much of your money is probably being spent on wants rather than needs is an important first step. Go through your past three months of credit card bills or bank statements, and circle all of the expenses that would be considered a “want.” If you typically eat out four times a week, reduce it to twice a week. If there are lots of clothing purchases, commit to reducing those purchases going forward. The idea is not to put yourself into a mode of deprivation. The goal is to identify where you can reduce expenses, thereby freeing up money that can be saved.
Discuss the topic of needs versus wants with your family. Share with them that you want to increase your savings rate, which will benefit the entire family.
Carl Richards, author of “The Behavior Gap,” astutely asks, “What if financial happiness is not about getting more, but about wanting less?” Many of the strategies discussed in my book are intertwined. Simplifying your life encourages you to have less “stuff,” which will reduce your spending on “wants.” Focusing on friends, family and experiences reduces the pressure to “keep up with the Joneses.” Taking steps to lead a healthier lifestyle while being grateful will indirectly help you keep a healthy perspective on money.
There are numerous ways to reduce your expenses. One piece of advice that was trendy in recent years was to eliminate the expensive cup of coffee you purchase on your way to work in the morning. One strategy may be to take your lunch to work three days each week to save money. You may decide to quit buying sodas when you eat out at a restaurant and to drink water instead. You may decide to use coupons for groceries and restaurants. Cellphone plans have become incredibly expensive.
The envelope system
Another strategy for saving money is the “envelope” system. It seems old-fashioned, except it really works.
When I was staying home with my daughters when they were very young, I began taking classes to earn my Certified Financial Planner’s® license. The courses were not offered in Albuquerque, so I took them as distance learning. I wanted to go to the library to study a few times each week, but that required hiring a babysitter. My husband was the sole breadwinner for a few years, and our cash flow was limited. I started an envelope system. At the beginning of each month, I put a fixed amount of cash in an envelope labeled “babysitter,” one labeled “eating out/entertainment,” and one labeled “groceries.”
My priority was to make sure I had enough money each week for a babysitter, because getting out of the house to study was important to me. The first thing I discovered was that when I paid cash for groceries, I spent significantly less than if I bought groceries with a check or a credit card. This dynamic has been verified numerous times in research.
Therefore, one easy way to reduce your spending is to use cash rather than credit cards. With the envelope system, I also discovered that I was willing to be very frugal with groceries and eating out/entertainment in order to ensure that my babysitting envelope had enough money to allow me to study two or three times each week.
The envelope system helps you focus on your priorities and using cash (instead of credit cards) makes you aware of exactly how much money you are spending. Although I have not found any research addressing this issue, I am convinced that our brains process the action of using cash to pay for items very differently than when we use a credit card.
The credit card is much more nebulous. It is an expense that we push into the future, which is likely why credit card debt is such an enormous problem for Americans.
An envelope system works very well for saving for a vacation, and you can include the entire family. Having the kids contribute a small amount of their allowance or birthday money to the vacation envelope is a great way to teach children the value of saving.
This idea can be expanded by building a colorful paper link chain. Each time $20 is saved in the vacation envelope, a link is added to a paper chain. This can be hung from a door so everyone can see it each day, and the family will enjoy watching the chain get longer as the savings increases.
An envelope system also works very well for saving money for Christmas or holiday gifts. This idea led to the old “Christmas Club” savings accounts that banks provided in the 1960s. My grandmother helped me open a Christmas Club account at a local bank, so this is a money message I remember from my childhood. I would deposit $1 per week for January-November. This would total $48. The bank contributed $2, and I received $50 in early December for buying Christmas gifts for my family. At that time, $50 was an enormous amount of money, and saving $1 each week made it easy.
Deciding to spend less on clothes in the coming year, to eat at home more (rather than in restaurants), and to be more frugal when buying groceries can all add up to a significant savings.
I welcome your feedback on what savings strategies work for you.
