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The way you spend money has a big impact on your financial well-being. Overspending can strain your budget, leading to debt and other financial problems. On the other hand, spending wisely allows you to build savings, limit debt and begin building wealth.
The following seven tips can help you spend wisely, including making a budget, spending on needs before wants and being smart with credit.
1. Create and Stick to a Budget
Having a budget is the key to keeping your spending in check. A budget is the master plan for how you're going to spend your money and ensures you don't spend more than you make. The basic steps of creating a budget are pretty straightforward.
- Calculate your monthly income.
- List your expenses.
- Allocate some money to savings and debt.
- Adjust your planned spending if it exceeds your income.
- Stick to your budget throughout the month.
The 50/30/20 budgeting method is relatively simple and a good place to start to keep your spending on track. There are other budgeting methods you can explore to find what works best for you. For instance, you may need a different budget if you're paid monthly. Your budget is meant to keep you on track, but it doesn't have to be restrictive. If you have enough room in your budget, build in a buffer for unplanned spending.
2. Prioritize Needs Over Wants
It may be tempting to splurge, but it's important to know the difference between what you need to survive and what you want in the moment. Spending so much on dining out, entertainment, clothes and the like that you're having a hard time paying your monthly bills and groceries could land you in debt. Focusing on your needs first is part of the foundation for financial security.
During your budgeting process, note expenses you should prioritize and those that should wait until you know you can afford them without going into debt. Essential living expenses like a mortgage, food costs and transportation costs are priorities, while things like vacations and hobbies can wait.
3. Use Your Credit Card—but Pay It Off Each Month
Using your credit card is a great way to build credit and earn lucrative rewards, as long as you can pay it off each month. Credit cards allow you to live beyond your means—a big mistake when trying to spend wisely, avoid debt, build wealth and ensure financial security. Use the two tips above to figure out how much you can safely spend on your cards each month. Then commit to paying off your credit card each month so you avoid paying interest and getting into debt.
4. Know Your Values—and Your Triggers
Take time to identify what's truly important to you and allow your values to guide your spending. For instance, spending extra money on fitness classes makes sense if health and well-being are important to you.
Likewise, it's important to know what tempts you to overspend. By recognizing your spending triggers, you can eliminate temptation or find another outlet when you feel tempted to pull out your credit card.
5. Reduce Spending Where It Makes Sense
Cutting costs is a good practice no matter how much you make. Every few months, review your spending and look for areas where you can cut back or eliminate expenses. Consider cheaper options, potential discounts and subscriptions that have raised prices or that you're no longer using.
For example, a quick phone call to your insurance company that saves you several hundred dollars a year is worth it. Eliminating unnecessary spending from your budget frees up money to save, invest or spend on things that really matter to you.
6. Consider Long-Term Costs
Some purchases come with ongoing costs that can raise your monthly spending. For instance, purchasing higher-quality clothes allows you to get more wear out of your wardrobe but may also increase your dry cleaning bill. Some smart electronics make your home more efficient but require a monthly subscription to take advantage of their features. Let your budget guide your buying decisions, considering how new ongoing spending will impact your financial goals.
7. Limit Your Payment Options
Today we have more payment options than ever. Many of them make buying so effortless, you may not realize how much you're spending. Using several payment options like mobile wallets, one-click purchases and buy now, pay later can make it a challenge to budget and track your spending.
Instead, stick to just one or two credit or debit cards for all your purchases, including purchases through mobile apps. Track your account balances regularly so you know how closely you're following your budget.
The Bottom Line
Spending wisely comes down to making choices that improve your finances and your life. It starts with creating a budget, but requires you to make sure your actual spending aligns with your plan.
If you're disciplined with spending, using a rewards credit card for purchases allows you to earn rewards that you can later use for a splurge. Before you start shopping for a new card, check your credit score for free to see where you stand. That way, you can narrow your search to the credit cards you're most likely to qualify for.