A number of you have concerns about budgeting, ways to keep track of your spending, working on your overspending habits … and so I thought I’d talk about all of that in one post.

This post is about budgeting, overspending habits, tracking spending, and financial priorities.

I’m going to talk briefly about one at a time, but they’re all related.

On Budgeting

I’m not a big fan of budgeting — I’ve tried it a number of times, and I’ve found it to be too much work and not a realistic way to manage your finances.

I’ve created detailed budgets, on a spreadsheet and also using financial programs like Quicken. They always seem great but they’re more of a fantasy than a realistic spending plan, and in truth, I never have been able to stick to them. I just feel guilty that I didn’t stick to the budget.

I’ve also done the Envelope System, and I find it better if you’re able to use cash but not as good if you do most of your spending online or using credit cards.

So what’s a better way? Here’s what I do:

  1. Review monthly (at first). In the beginning, it’s a good idea to quickly look over all the things you spent over the last month. I use Mint.com, and try to do most of my spending with debit or credit cards, or automatic payments/transfers, so it’s all automatically recorded and entered into Mint.com. At the end of each month, I look over my expenses. Mint.com can add up your “dining out” and “clothing” expenses, etc., so you can see how much you’re spending on different categories. I’ll be able to see if I’m spending a lot more than I realized on something, and then ask myself if there needs to be a change.
  2. Adjust your spending so it matches your values. Instead of spending based on a budget, try to match your spending with your values. Every category represents a value — for example, eating out means you value dining experiences (by yourself, with a partner, or friends), but travel means you value travel experiences, and clothes means you value having nice things. For me, I like having experiences with friends and family rather than having nice things, and I value health (buying a bike) and financial security (debt elimination, saving and investments) over spending on entertainment. In the beginning, my spending didn’t reflect those values, but over time I’ve shifted my spending using these reviews, so that now a big part of my spending is on things I do with my family (travel), health (healthy food, workout equipment), financial security (investments). This takes time, but if you review regularly and ask yourself if you’re matching your values, you can make the shift.

So that’s my system. After awhile, I didn’t need to review as much — maybe every 2-3 months, and definitely a more thought-out review every year. I review things like my spending on housing — is it important to me to live where I live, or can I move somewhere else and save money? Is it important to buy a TV or can I get free entertainment? Is it smart to buy whole foods (which might cost more) so that I spend less on medical bills over the long run?

Reviews might seem like a pain but in reality they don’t take that long, and I’ve found this system to be much less painful than budgeting or any other system I’ve tried.

Breaking the Overspending Habit

What if you’re addicted to certain kinds of spending? How do you change your spending habits?

One example is buying clothes, or having the urge to buy new things … this can be a difficult habit to break!

For me, it was about rethinking my values. Did buying new clothes (or gadgets) match my values? It definitely did not, especially when spending makes me less able to save and invest (financial security value).

Then it was about creating awareness of my spending — this is where the monthly review came in. I wasn’t willing to track and review my finances every day, but a monthly spending review wasn’t that hard. And as I did this each month, I became aware that I was overspending in certain areas — let’s say clothing, or eating out. This made me not want to keep doing that, so I made conscious choices to cook more and pause before deciding to go buy something.

This kind of review can be eye-opening if you haven’t done it yet, and you don’t think you’re extravagant in your spending in certain areas. It’ll make you aware of those luxuries you’re overspending on, and see that you’re not putting enough towards things that matter more to you.

Finding Money to Invest

A few people asked about finding money to invest, or whether they should invest while trying to pay off debt.

Let me answer the questions in two answers:

  1. Over time, decrease spending on less important categories. If you do a review of your spending and it turns out you’re spending a lot on massages and spas, you’ll want to do that less often so that you can find money for savings and investments. If you’re spending a lot on clothes or eating out, cut back on those over time. If you’re spending a lot on housing, find a cheaper place to live — it’ll make a big difference in your finances. Cutting back to one car can make a big difference. Canceling your gym membership (or any other membership) and working out at home can be a good chunk. Many of these can’t be done today, but can be done over the next 3-6 months, and you’ll slowly find more and more for investments and savings.
  2. Put an emergency fund, then debt payments, before everything else. Your No. 1 priority should be an emergency fund of some kind, just in case something unexpected comes up. This is the foundation of your financial security. Next is debt payments — if you’re spending money on debt interest or late fees, this is wasted money, and so you want to pay this off as quickly as possible. It doesn’t matter if you’re not investing if you have debt. You want to pay the debt off, then worry about savings and finally investing. Yes, it would be great if you could invest right now, but you have to focus on priorities.