In previous blog posts, I covered each of the “fixed” expenses and how you can cut back on them to save more for your goals. This leaves discretionary expenses like food, entertainment, and shopping that you have more control over on a day-to-day basis. The problem here is that because the amount we spend on these items tends to change so much from month to month, they can actually be harder to manage.
There are lots of tips out there for how you can save money in these areas. Personally, I find that the most important thing is to give yourself a fixed allowance for how much you can spend on these expenses each month. You can then use that money however you like, but when it runs out, it’s out. This helps ensure that you’ll meet your savings goal and not spend more than you earn. It’s then up to you to figure out how to prioritize what’s most important to you. Want to eat out every day? Go ahead, but it might mean not having much money for shopping, or vice versa.
Any part of your allowance that you don’t spend can then be rolled over into future months, and eventually be used for something big like a vacation or holiday gifts. I personally find this easier to manage than having multiple savings accounts for different goals, and it allows me to keep all of my cash in a rewards checking account to earn the highest possible interest. It can also be much easier to motivate yourself to save for that trip to Europe you’ve been dying to take at the end of the year, than for a retirement that may seem so far off.
There are a couple of ways to make sure you don’t spend more than your allowance. If you purchase a lot of things with credit or debit cards, you can track your purchases online for free with a site like Mint.com. You can even have it set up to send you emails or text messages on your phone if you’re in danger of going over your budget.
For those more old-fashioned, you could simply withdraw your allowance in cash each week or month and limit yourself to spending that amount until your next withdrawal. This makes it easier to keep track of, and studies have shown that people tend to spend less when they use physical cash. On the other hand, you miss out on credit cards rewards and run the risk of having a large amount of cash lost or stolen.
One final note is that I’ve found that this approach works great for couples who are having disagreements over how money is spent. To be shamelessly stereotypical, let’s say the husband doesn’t understand his wife’s clothing purchases and she doesn’t get why he needs to buy a bigger screen tv. Rather than argue about the details, they can give themselves each an allowance to spend however they like, but the amount of the allowances would be set to accommodate their shared household expenses and saving goals.
If you have experiences with this or other money management strategies, feel free to share them in the comments below.