Here’s the setting: You’re committed to living in financial freedom. You’ve got big dreams and goals. On paper, you have a balanced budget, meaning, your expenses are less than your income each month, so there is money for savings and investments that support your goals. You’ve got an emergency fund. You’ve got no consumer debt and you are working toward paying off your mortgage. You’ve got a great plan to realize your dreams but there’s just one problem: At the end of each month, there’s not much money left to meet your savings and investment goals. You are trying to do everything right but you are leaking money somewhere. A little over budget here, a little over budget there and next thing you know, there’s little money to save or invest for the future. Help!
Three Common Budget Leaks…
Budget Leak #1: Eating out
What is the biggest discretionary expense budget leak? Eating out. Eating out has become a bigger and bigger percentage of the American family food budget to the point where in 2015, the cost of eating out surpassed the cost of groceries in the average American food budget. And eating out can quickly become a budget buster! By the numbers, a home cooked meal averages about $2.45/meal whereas the average purchased meal is $7.55/meal. That’s almost three times as expensive as eating at home! All told, the average American family spends around $2,650 a year eating out, or $50/week. How does your eating out spending compare?
Budget Leak #2: Paying for Convenience
The cost of convenience can cause several leaks in your monthly budget. Whether it is food, coffee, getting cash, mowing the lawn or getting our entertainment, the issue is usually paying money to save time. So we do things like buy food or a snack at the convenience store attached to the gas station while we are getting gas. Or we buy our coffee on the way to work instead of making it ourselves. Sometimes it is as simple as hiring someone to cut our lawn on a regular basis so we don’t have to do it ourselves. One type of convenience option that is popular but mostly forgotten are the entertainment subscriptions: Most of us have Netflix and/or Hulu, cable on demand or premium cable channels. In each of these cases, we pay a premium for convenience. The question is, are we using them and getting the value out of them?
By the numbers, convenience food and drink is roughly 50% more expensive than that from the home. The average lawn service is $150 a month and average monthly entertainment subscriptions are $83/month. Don’t forget about other convenience costs too like ATM and other banking fees, home cleaning and valet parking. All told, we have hundreds of dollars of convenience spending each month. Is it worth it?
Budget Leak #3: Impulse buys
Impulse buying is a huge budget breaker. Everyone does it, right? Well, yes, according to a 2015 report, over 84% of Americans admit to impulse buying. And most of that impulse buying is done in the store (79%). In fact, department stores, grocery stores and more recently, online stores focus their displays to promote impulse buying. That doesn’t come as a surprise. What may be a surprise to most of us is that a recent report it was calculated that each American family will spend more than $114,000 in their lifetime on impulse buys! In the long run, is it worth it? Most times, no. But we see that pretty display or see that sign that says “Sale” or “For a limited time only”, and we just have to have it. This is what I know, most of us can’t recall that impulse buy we made last month or last week, but we would remember anything we did with $114,000 if we used it to fund a life goal and dream with! That would be a really big life goal(s)!!!
…And Four Ways To Prevent Them
Budget Leak Prevention Tip #1: Get The Budget Order Right
Warren Buffett is credited with this quote about the proper budgeting order for savings and spending: “Don’t save what’s left after spending, but spend what’s left after saving!” This quote sums up the proper approach to determining our starting point for budgeting our expenses. The dollar amount we have to spend each month is determined AFTER we pay ourselves (and fund our dreams) first. Fund your emergency fund, retirement fund, college expenses fund and future purchase fund first. Then allocate the money that is left for spending. This is the first, and most important (arguably) action to prevent budget leaks.
Budget Leak Prevention Tip #2: Know The Value Of Your Time
The value and convenience of using services to gain more time in our schedules is frequently worth it. But not always, so we need to know the value of our time so we can answer the question: Is the cost of this service worth it? We want to spend money when it is worth the cost in our lifestyle and budget. But we have opportunities to save money (and stop budget leaks) if we can eliminate unnecessary and cost prohibitive services, or services we have just because someone you know is doing it. For me, I use $50 an hour as the value of my time. So if there is a task that costs more than $50/hour, I try to do the task myself. For each person and each task, this value varies. But it is good to review the value of each service you are using to look for ways to save money (or stop leaks) in your budget. Here are some personal examples: Cutting the lawn, cleaning the house and small painting jobs are all jobs I choose to do myself in order to save money in my budget. Why? Because these tasks cost more than $50/hour to have someone else do them. But things like changing the oil in my car ($24) and weekly trash service ($4) we have others perform because it is not worth our time to do. Know the value of your time and know what you are willing (and not willing) to do to save money for bigger purposes like funding goals and dreams.
Budget Leak Prevention Tip #3: Maintain Short Term Goals
Having short term goals to work towards keeps us motivated to stay on our budget. In Tip #2 listed above, I mention that I chose to mow my own lawn and clean my own house. Why would I do these dirty jobs? The answer is simple: Because the cost savings of those two actions alone, over the course of a year, completely pay for one of the vacations we take every year! That’s right, a little bit of dirty work each week (under an hour each) provides us with a debt-free vacation to our happy place. To me and my wife, it is worth it. Having that short term goal also motivates us when we don’t feel like cleaning and mowing the lawn.
We have made other short term goals that help keep us on budget to achieve bigger goals and dreams, like retirement, the children’s education and, someday, a new, smaller home, paid for in cash. For example, the goal to fund retirement requires a very bigger number, seven digits. Seemingly almost unachievable. But breaking down that goal into monthly savings amounts makes it seem doable and motivates us to stay on our savings plan.
Budget Leak Prevention Tip #4: Practice Contentment
Practicing contentment helps us prevent budget leaks because it reduces our need for spending, impulsive or otherwise, that comes from the need for instant gratification or from envy of the neighbors. Contentment helps us keep our eyes on our bigger dreams and goals, and away from the immediate wants in front of us. Sometimes contentment gets a bad rap, and is viewed as being complacent or staid. But that is not contentment at all. Contentment is being joyful and having ease of mind where you currently are (and maintaining the budget), on your way to where you are going (dreams and goals). And we need to work at (practice) contentment because it doesn’t come to us naturally as we are bombarded with commercials and advertisements telling us that we need more (spending) to be important, successful and happy. In essence, contentment helps us prevent budget leakage from seemingly “good” ideas at the time, to save up for “great” dreams and goals in the future.
The Final Say
U.S. News and World Report did a study that found that the average American spends 22% of their discretionary money on things they can’t recollect. That’s almost one out of every four dollars spent that has no lasting value! That’s a lot to pay for forgettable stuff! The purpose of making and using a budget is so that every dollar is allocated according to your dreams, goals and plans. Thus, budget leaks are dream stealers and should be prevented or corrected. I hope these tips help you prevent budget leaks and I hope you achieve everyone of your dreams and goal!