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Budget Busters & Financial Fixes
I have a soda problem. From the sounds of it, you probably do too. According to the National Soft Drink Association, the average American consumes 600 12-ounce bottles of soda every year. Men between the ages of 12-29 make up the largest consumers and tip the averages because of their 1/2 gallon per day consumption. Let’s put this in perspective. I stopped at a store recently and went to buy a soda. The cost for one 12-ounce bottle was $1.69. This means that, on average, each person spends about $1,014 per year in soda. If you are married and have kids then this number easily multiplies by two or three. If these numbers are accurate then it is not hard to see why the average American household is struggling to win with money because of simple budget busters like this.
Let’s assume some more since we’re here.
Let’s say that today was the first time that you recognized the true cost of what you’re spending on soda and you wanted to drastically cut down on it. Instead of drinking yourself into obesity (which is what research shows you are doing by drinking too much soda) you decided to invest the money instead. You are a realist though and you know that you won’t cut out 100% of the soda that you’ve been drinking, so you decide to cut back by 75% instead. On an annual basis you would save your self $760 per year or $65 per month. If you had invested this money every month for the past 20 years and earned 5% on your investments, you’d have nearly $27,000 in the bank. That’s a significant amount of money earned on a soda budget!
You might resist this argument at this point because soda is not your vice. That’s fine. But what is?
I was talking with a friend a while ago who was really struggling to make ends meet. He asked me if I could look at his budget and help him find some ways to make it through this rough time. I gladly agreed and began asking him to list all of his monthly expenditures for me. There were the normal ones that most of us have such as housing, electricity, gas, car payments, food, etc. Then he told me that he smoked about a pack of cigarettes a day. I asked him what this cost each month so that we could put it down on the list. As you can imagine, it was several hundred dollars every month. I didn’t have to say much after that as far as figuring out how to help him save some money. He especially wouldn’t have liked what I would’ve said if I had grabbed the soda from his hands!
It is the same for most of us. If we really began to look critically at our expenses, we would find that there are things that we really enjoy but that are busting our budgets. Which leads us to point #1.
#1: Annualize your expenses.
One of the biggest mistakes people make is looking only at the smaller cost up front. It is like saying that a soda is not the culprit in your busting your budget because it only costs $1.69. When we look at it like this we miss the true picture and cost of our spending habits. $1.69 is not the problem – $1,014 per year is! Imagine, for example, how much more you’d have to think about purchasing that soda if you had to lay out your budget and put down $85 per month in soda alone. That’s the effect of your $1.69 (at a time) habit. Failing to annualize your spending will definitely bust your budget and cause you to miss out on opportunities to save some money.
The next budget buster is similar to the first.
#2: Create a $0 budget.
People who do not like the “b” word (“budget”) often say this because it feels like it is restricting you and bossing you around. But the reality is that when you do not have a clear understanding of where your money is going you will end up looking back someday and thinking, ‘Where did all of my money go?!’. The great thing about laying out a budget like this is that you stay in control. A budget is simply telling your money to behave. By creating a layout of your money and determining where you’d like it to go before it gets in your hands you will find that you can still spend money on things that you enjoy but you won’t be surprised to find out that you can’t retire one day because you enjoyed too much soda. It is a fairly simple process of writing down how much money comes in and where it needs to go. If soda is your must-have thing, then put it on the budget and allocate that much to it. Just be sure that your budget equals zero after subtracting all of your expenses from the amount that came in for the month. That’s it!
By the way, if you want to find out if you are in charge of your money or if you’re money is in charge of you, simply answer questions like these as quickly as you can: How much money do you spend each month on gas? How much on groceries? How much on coffee? etc, etc. If you answer any spending questions with, ‘I’m not sure. Probably…hhmmmm….’ then you are losing and are probably busting your budget. Budgeting does not restrict you from enjoying life. It simply means you have to say yes and no to certain things so that you can stay in control of it. If you’re not sure how much you’re spending, then start here by simply tracking your spending for 60 days before creating a budget and then averaging out your spending habits. You’ll probably be shocked to see what you are actually spending and where.
This leads us, then, to the last thought.
#3: Determine your priorities.
The truth of the matter is that winning with money is all about priorities. A vast majority of us simply spend money with no consideration as to why we spend what we do. We simply ask ourselves how much we can afford and what we can buy. Because of this, many of us are in huge trouble with our money because we have no discipline with it. Here’s the thing we all need to do – determine your priorities before you spend your money. You cannot have discipline with money until you start with your priorities. If you live your whole life with no financial discipline you will make no progress on your financial journey. It’s that simple. So ask yourself some tough questions. If nothing changes in regards to how you spend money, what will the next 2 years look like? 5 years? 10 years? How much exactly do we spend each month in each area of our budget? What things do I need to say “no” to so that I can lead my family to a healthier financial situation? Why are we not living on a budget right now?
Maybe the best question you can ask yourself is this: When it comes to managing money – who owns who? Do you own your money is does your money own you? We are bombarded with commercials and advertisements everywhere we go demanding our attention and screaming for our hard-earned money. We have to learn to be aware of what we’re up against and create the protection that we need in the form of a budget in order to win. If you’re tired of losing at money, then give this a shot. Don’t let lack of planning bust your budget any longer.
Join the conversation! What is the toughest thing about budgeting for you? What have you learned to do to win with money? Please share your thoughts and ideas below.
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Picture courtesy of 401k’s photostream on Flickr