Every adult needs to have an income; it is your incoming funds that pay for your outgoing expenses. Your expenses will be either obligatory or optional. To avoid becoming overwhelmed by future debt, it is important to realize that your incoming funds, usually from your job/career, investments, inheritance, etc. can all vaporize quickly if you do not make a conscious decision about planning and balancing the spending and savings for your life.
Income left over after paying essential (obligatory) expenses and debts is the money available to expend/invest at your discretion. How you spend this money is called discretionary spending.
Obligation Spending (Required/Necessary)
There are two types of obligatory financial spending:
- Necessities of life (shelter, food, water, education/training)
- Acquired obligations (vehicles, furnishings, membership fees, etc.)
Every adult needs to care for himself or herself and his or her family, as applicable, so the cost of renting, eating and utilities are obligations to which you have committed yourself. Part of planning for obligations should also include:
- Putting some monthly income into an emergency account
- Having a savings account for planned purchases like a home down payment or smaller items like a TV
- Having a savings account for retirement funds and/or education funds
Include these three accounts, plus your monthly mandatory spending (rent, utilities, groceries, personal and housekeeping hygiene products), as part of your non-discretional accounting. Whatever funds are left from your monthly income after planning for these expenses/savings will be your discretionary spending allotment.
Optional Spending (Discretionary)
Discretionary funds can be spent or saved. There may be little or a lot left after paying off your obligations (bills/payments) and allotting funds for your savings plan. If you have increased wages or an additional job or decreased expenses, there may be more leftover funds available to save or spend as needed. Conversely, if you live on a slim income or have a lot of expenses, there will be little left. This can improve by managing debt unless you are on debt overload already.
Personal Debt Management
Outside of acquiring an extra job or creating a means for increasing your income, reducing discretionary spending can help tremendously with personal debt management. Many individuals are in and out of their financial danger zones and manage by changing their discretionary spending habits. To better manage your finances by altering your discretionary spending, the following tips are advised.
Make a List of Your Spending Habits
Review your spending patterns by keeping track with a list of how you spend discretionary funds each day for at least a few weeks. You may not be aware how much several small purchases (e.g., coffee, snacks, newspapers, lunches) add up over time. Begin by listing nonessential (optional) expenses and assessing the patterns (eating out, trips, entertainment).
Also, make a list of your monthly and annual obligations so that you have these in mind as upcoming payments along the way. For instance, monthly payments may include credit card payments in full, utilities, rent, etc. Annual expenses may include insurances (auto, home, life, tenant), license plate stickers, taxes, etc.
Consider How You Might Reduce Spending and Save More
Estimate the savings that could result from reducing your spending, even if only for a short period. Before buying, ask yourself, “Is this something I want (optional) or need (require)?” This is an important distinction and you can put a note or sticker on your debit or credit card as a reminding question. Much self-discipline is needed by all to avoid over spending.
Here are examples of how you can reduce your overall discretionary spending:
- Reduce your spending on meals eaten away from home by bringing a lunch to work instead of eating out. Eating out is often one of the largest forms of lost funds through this discretionary spending.
- Seek less expensive forms of entertainment. Save money on theatre, movies, and eats by renting a movie and making homemade popcorn instead; decrease pub crawling and cab costs by enjoying beverages with friends at your home or theirs; read a novel, or browse your community newspaper for local events that are free or low-cost. Keep in mind that outside entertainment can be costly, especially when considering related expenses such as food and drinks, tips, parking, cab fares and babysitting.
- Use community resources where possible, including your local public library for borrowing books and movies instead of purchasing these items, and using community parks and recreation programs and facilities instead of private fitness memberships. If you can pique your interests through these resources, you may find it a little easier to manage your discretionary spending.
- Be mindful of the number of extracurricular activities into which you register yourself or your family as these commitments may also incur additional costs like equipment purchases or clothing-specific costs.
- Expand the time between barber or hairdresser appointments or shop around for better prices or other options.
- Expand the time between trips to the shopping mall or go only when there is a real grocery need in order to limit impulse buys.
- Walk, ride a bicycle or use public transit where possible to reduce the amount of gas you use.
- During holidays, stay home and relax, participate in outside fitness activities, or learn new skills instead of planning an expensive trip. Consider day trips, visiting friends or family, or going to a park for a picnic or camping.
- Limit gift giving to specific individuals and set a reasonable dollar amount that works within your budget, or consider skill or task exchanges instead of store-bought gift purchases.
- If you are a smoker and are trying to quit in order to save money, call a smoker’s help line and make a plan to get healthy. You can then reallocate smoking or snuff expenditures into stop-smoking aids which will reap you more savings in the end.
Postpone Purchases where Possible, Especially Large Purchases
It is a societal norm to “buy now and pay later,” especially since the onset and ease of store credit. If you have decided that the item is something you need, then ask yourself, “Do I need to make this purchase now or can it wait? Is there a benefit to waiting?” If you can temporarily delay expenses, especially major purchases such as a new vehicle, furniture, home upgrades, computer, phone, or home theatre system, then you may be able to reach your cash reserve goal. The plan is to simply postpone these purchases, and waiting can often result in an increase in the level of enjoyment had from a later, debt-free purchase. Waiting can also result in buying a better product or reduce your desire to purchase a particular item.
How you choose to use your discretionary spending is a matter of making wise personal choices. Cutting back today can be expected to pay off in the long run. The best method of managing your finances is one that works for you. Reducing discretionary spending is just one component of doing whatever it takes to be successful and debt free!