Managing Spending

How to buy what you want while saving for the future and protecting what you own.

This is a chapter preview. To read the full chapter, click here. 

TL;DR

1. Managing spending begins with a review of your budget to identify priority spending categories and cancel unused recurring expenses 
2. Strategies for saving money on purchases include sales, coupons, buying in bulk, and shopping second-hand
3. You can avoid the pitfalls of lifestyle inflation - when expenses increase proportionally with higher income - by minimizing your bills and maximizing savings before changing your discretionary spending habits
4. Purchases should be protected with an insurance policy or warranty if the loss or damage of the property would cause you financial hardship 

Managing spending means ensuring your expenses align with your budget and values. This doesn’t mean buying the cheapest goods and services possible. Rather, it’s deciding which spending categories are priorities and applying savings strategies on less important items. 

Managing spending allows you to live your desired lifestyle while protecting your credit and investing for your future. To start, take a look at your budget.

Budget Considerations

Your budget is a necessary tool for finding opportunities to manage money better. A budget can be used to identify expenses you no longer wish to pay, visualize spending across categories, and templatize saving for longer-term goals.

Use your budget to review all regular expenses and look for bills paid to services no longer actively used. Most automatic bill payments do not end unless the payer instructs them to. Therefore, you could be paying for services you stopped using without realizing it. 

In addition to unused services, try and identify redundant regular expenses. Sometimes, expenses paid to multiple providers can be consolidated into one. For example, if you pay two competing businesses like Spotify and Apple Music, consider dropping one of these subscriptions to save money every month. Apps like Truebill can help identify regular payments to expenses you may want to stop, but be aware that using these services requires you to provide them with your personal banking information. 

With regular expenses addressed, turn your attention to spending category allocations. Review the approximate dollar value spent every month across different categories. The following table can be used as a template:

Refer to benchmark spending allocations during this exercise. Note that many banks and credit unions provide tools to build this visualization for you.

The purpose of this exercise is to ensure spending within each category is reasonable and reflects your values. If spending in any category is disproportionately higher than others or than you expected, consider whether you want to continue spending more of your money on this category or reduce it. This is where your values and attitude towards discretionary spending factor in. 

If the categories you spend the most on also bring you the most joy, you may not necessarily be spending too much of your money on these expenses. However, to stay within your budget, you might need to compromise by saving more in the categories you value less. 

For example, you may spend a greater portion of your income on food and entertainment because these spending categories bring you the most joy. To continue prioritizing spending on food and entertainment, you should be willing to cut costs in other categories like clothing, transportation, or housing. This way, you can continue buying what’s most important to you while recognizing the frugality needed to maintain your desired lifestyle.

Inferior & Luxury Goods

When evaluating savings strategies, consider the quality of goods and services you purchase across spending categories. Quality can generally be categorized into one of three classifications: inferior, normal, and luxury. 

A luxury item is not a necessary purchase but is deemed highly desirable within a culture or society. Demand for luxury goods increases when a person's wealth or income increases. Typically, the greater the percentage increase in income, the greater the percentage increase in luxury item purchases. Although luxury items are expensive, this doesn’t always mean they are higher quality or longer lasting than cheaper alternatives. For example, a BMW may be more expensive than a Toyota, but this doesn’t mean the car will provide greater value.

An inferior good, by comparison, is a good that experiences decreasing demand as a person's income increases. For example, Sally might have a higher demand for cheap, store-brand coffee when her income is low. However, as Sally’s income increases, her demand for store-brand coffee decreases in favor of more expensive, higher-quality coffee. Normal goods, by contrast, fall between luxury and inferior, as they are not the cheapest nor most expensive offerings available. 

All consumers need to find a balance between the luxury, normal, and inferior goods they purchase. Spending on luxury goods and services should generally be reserved for the spending categories you enjoy the most. Returning to the example above, if buying first-row concert tickets – a luxury purchase – brings you the most joy, you should consider buying normal and inferior goods in other spending categories. This could mean buying cheaper groceries or clothing to stay within your budget. 

Another tactic for affording luxury items and larger purchases is to create expense-specific budgets. To do so, divide the total cost of an expensive product or service by the number of months it would take to afford it, then save that amount each month. Consider opening a checking account specifically for purchases of this nature, such as an annual vacation or down payment on a home.  

 

 

 

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Saving Strategies

Common strategies for saving money include comparing prices, using coupons, and shopping for used goods. In some instances, paying for items in installments — often called layaway or buy now, pay later — can be an appropriate tool for affording large-scale purchases.

Compare Vendors

A good way to save money is to compare prices across different vendors by shopping at more than one store. The same product available at one store may be available for less at another. 

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Brick-and-mortar stores and online retailers compete on price, so check both types while shopping. When evaluating the cost of an online purchase, make sure to consider shipping costs — the price of sending the product to you. Note that some retailers cover these costs if the product is above a certain dollar value or sent to a retail location for pickup. Additionally, some stores offer price matching, a policy that allows them to match or beat the price of an item they sell if you find it cheaper elsewhere. To compare prices online, use a browser extension like Price Blink.

Stores compete by offering sales, a temporary reduction in price for a good or service. Businesses offer sales to clear inventory and encourage spending. You can learn about sales by signing up for alerts or loyalty programs with the stores you often shop at. Sales can happen at any time and for any duration but are most common around the holidays. 

Coupons

A coupon is a deal on certain products or an entire purchase made at a specific store.  Coupons can be a physical piece of paper or a digital code you enter when checking out online. 

Coupons are most effective when used for items you already planned to buy. To find them, browser extensions like Honey search promotional codes online and automatically apply them during checkout. (Like all browser extensions, Honey can read and change a limited amount of data in your browser.) Similarly, Groupon is an online marketplace that publishes deals on activities, travel, products, and services in your area. 

Buy Second Hand

Used goods are often cheaper than new products, so shopping second-hand can be an effective way to save money. Thrift stores sell used clothing and household goods, consignment stores sell curated used goods, and garage and estate sales sell others’ personal property. Online retail stores, including Poshmark, Depop, Mercari, and Kidizen, allow you to buy used goods directly from sellers. In addition to these merchants, check your local newspaper’s classified advertisements or online marketplaces like Craigslist or Facebook Marketplace for nearby offers. The universe of secondhand goods is enormous – find deals and you can save big. 

Layaways & Buy Now, Pay Later

Layaway is a method of buying something in installments, typically after depositing a down payment. The store holds the item until you pay the remainder of the price in full, after which you take possession. In this way, layaway provides customers an extended period of time to afford merchandise.

Buy Now, Pay Later (BNPL) is a similar type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. Also referred to as "point of sale installment loans," BNPL arrangements are an increasingly popular payment option, especially when shopping online.

Both layaways and BNPLs are convenient but carry risk. While participating in these programs doesn’t generally impact your credit, defaulting on a purchase can. For this reason, these programs should only be used sparingly. In general, it’s safer to pay for items upfront than to risk your credit for something you may not be able to afford. 

 

 

 

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