Allowing spending to exceed income is the cardinal sin of good cash flow management. Earned income is normally used to cover day to day expenses, with a little left over for a rainy day (or retirement). But when spending outstrips earnings, savings are used up and debt grows. Debt is literally the opposite of financial freedom, making a promise to work in the future to pay (a higher price) for enjoyment today. Debt has the effect of narrowing options and forcing a person to work for someone else.
How can you tell that you are losing your financial freedom? A sure warning sign is carrying a balance on a credit card. If someone were paying with a credit card, but not able to pay the full bill each month, they are spending more than they can afford. Another warning sign is a growing line of credit. Maybe the credit card is paid off each month, but the line of credit grows larger. Another signal is getting help from a parent or other family member. Some people get into “temporary” trouble with a credit card or a medical bill or other expense, and get help from family to get out of a tight spot. The problem is when they keep getting into trouble and asking for more help.
Often, the first reaction is to set a strict budget. I’m not a fan of budgets. I don’t have a budget and I have rarely met anyone who enjoys budgeting. What I believe is that it’s essential to understand how much spendable income you have, and to try to arrive at the end of the month with a little left over. What my wife and I found helpful was to look at our bank statement each month. Our bank totaled the deposits, totaled the withdrawals, and showed the difference as an increase or decrease (in net worth). Most months, we were proud that we had an increase, although there were some bad months. The important thing was that there were more good months than bad ones.
I don’t care how you decide to spend your money. Personally, I hate lists like “how to save $0.10 on a grocery bill”. It’s important to use our resources (money) wisely, but there’s the risk of being cheap. And that’s before accounting for the fact that people will spend differently, depending on what’s important to them. It’s not my place to judge what’s important to you, as long as you spend within your ability. Otherwise, you’re selling away your freedom.
If you find that you are overspending, I have a suggestion. First, put away or cancel your credit cards. Don’t use them for one year. Don’t use your debit card for purchases, only for deposits and withdrawals at the bank. It turns out that there is more psychological resistance to parting with cash from your wallet than there is to paying with plastic. So take out enough cash for a week (or two weeks, or a month) and use that to pay. When your wallet is empty, stop spending until the next withdrawal. In this way, you can mentally track your spending and build good habits. And if there’s money left at the end of the month, feel free to indulge. Money is meant to be enjoyed, not to cause feelings of guilt.
How do you keep your spending under control? Has this ever been a challenge for you?