If you want to be financially successful, you need to start by focusing on one important principle: spend less than you earn. If you live below your means, you’ll end up with a surplus of cash every month. With that extra money, you can establish an emergency fund, invest in assets like stocks and exchange traded funds (ETFs), and pay off your debts more reliably.
But you can’t accomplish any of these goals if your budget is bogged down by overspending. If you spend too much, you’ll barely break even, or worse, you’ll end up going in debt to make ends meet.
The good news is that most Americans overspend in predictable ways – and all these instances of overspending can be overcome with a handful of simple strategies.
Areas Where You’re Overspending
These are some of the most common areas of overspending:
1. Housing costs. Housing is going to be your biggest expense. Experts recommend spending no more than 30 percent of your gross monthly income on rent or a mortgage payment – and even that’s a little on the high side. In other words, if you make $5,000 per month, you shouldn’t be spending more than $1,500 on rent. Ideally, you’ll be spending even less, like $1,200 or $1,000. If you’re currently spending too much, consider moving to a less expensive part of the city or downgrading your home to a lower square footage. This might not be the most attractive or exciting move, but if it can save you hundreds of dollars each month, it will be worth it.
2. Car insurance and fuel. Next, you’ll need to think about how much you pay to continue driving a car. The cost of fuel may not seem like much, especially if you only drive a short distance each day. But do you know how much you’re paying for car insurance? The average person pays $113 per month, or $1,348 every year. What about ongoing maintenance? You’ll likely need regular oil changes and occasional repairs, which can cost hundreds of dollars a year as well. Plus, you’ll be responsible for ongoing car payments if you took out a loan to pay for it. Reduce these costs by driving a less expensive vehicle, or by relying on a combination of bicycling and public transportation.
3. Utility bills. Most people pay too much for utilities like electricity, natural gas, and water. While these are practical necessities, you can reduce your consumption in a number of meaningful ways that shouldn’t impact your quality of life. For example, consider investing in energy efficient appliances that use less energy for the same task. Consider changing your habits, such as turning lights off more consistently, and hanging your clothes up to dry rather than using the dryer.
4. Food and drinks. How much are you spending on food and drinks? You can immediately cut your expenses here by going out to eat less. Instead, buy your own groceries and learn to cook; you won’t believe how much money you can save, while still getting great meals every night. You can save even more money by looking for sales, shopping at the right stores, and prioritizing inexpensive foods.
5. Subscription services. Most people underestimate how much they’re paying for subscription services. On average, people guess they’re spending close to $80 per month on subscriptions. In reality, they’re paying closer to $238. Some of those subscriptions are probably going totally unused; if you can cut your costs in half, you can end up saving nearly $1,500 per year.
6. Social events. How often do you go to parties, weddings, birthday gatherings, and other celebrations? Each time, you might bring a bottle of wine, a gift, or something else of valuable to the hosts, or for part of the celebration. A few times a month, this may be no big deal, but if you’re constantly socializing, the costs can quickly add up. Enjoy a quiet night at home every now and then.
7. New technology. When a new model of phone comes out, do you rush to buy it? Do you always need to have the latest gaming console? New tech is always overpriced, so consider waiting a year or two to capitalize on cheaper prices.
The Importance of Transparency
It’s perfectly okay to splurge on things from time to time; you don’t have to live like a monk or reduce your expenses to the absolute minimum to be financially successful. However, you owe it to yourself to achieve as much transparency and understanding as possible.