How do you spend less than you make?

[lorraineb]

I have a question. When people are spending more than they make, how do you explain to them how to spend less than you make? What exactly do they need to be able to move from spending more to spending less than they make? Is there a 10 step process out there, or if there isn't, what process would you put together to help someone move from one place to the other?

[disneysteve]

I think the starting point is creating a budget. They need to sit down with paper and pencil and list how much they earn after taxes and any deductions and then work through their bills and expenses against that income. If the expense side exceeds the income side, they need to cut things until it works. The other key piece is to build savings into the equation. Make a line item in the budget at the very top for savings. Don't plan to save what is left over, because there won't be anything left over.

I've often asked the opposite question. How do so many people spend more than they make? I've watched some of the financial intervention shows like Bank of Mom and Dad or Til Debt Do Us Part and the people featured are spending hundreds or thousands more than they earn each month. It boggles my mind that they can do that and not even be aware that it's happening.

[cardtrick]

The single biggest expense that people usually have is housing. If you net 3K a month and you're paying $2K just for housing, not much you can do to stay above water. Start with that. You can usually save quite a bit by downsizing.

[Weird Tolkienish Figure]

I have a question. When people are spending more than they make, how do you explain to them how to spend less than you make? What exactly do they need to be able to move from spending more to spending less than they make? Is there a 10 step process out there, or if there isn't, what process would you put together to help someone move from one place to the other?

Get rid of the debit card if you have one, use cash. Harder to get crazy with money when you have to keep withdrawing it out of the atm.

[edg126]

What worked for me was to spend one month with absolutely no entertainment expenses and bare bones food expense (PB&J every day for lunch, oatmeal for breakfast, chicken and veggies for dinner, basic stuff like that). I kept the same active social life, but just wouldn't drink at the bars.

When I saw how much I could save it incentivized me to save more, and so I kept some parts of the frugalness, but would add some because what fun is it to live barebones?

As the previous poster said though, it's tough to do that if you have a high mortgage, car loans and student loans.

I still like to do that 'cleanse' once a year or so, it makes it an interesting challenge to see how far I can go without pulling out the wallet, but I won't hold off on replacing things if something breaks, and won't mooch off of other people.

Now with 2 kids in daycare i have no debt except the mortgage and save close to 30% of my take-home pay.

[UnknownXV]

I think the starting point is creating a budget. They need to sit down with paper and pencil and list how much they earn after taxes and any deductions and then work through their bills and expenses against that income. If the expense side exceeds the income side, they need to cut things until it works. The other key piece is to build savings into the equation. Make a line item in the budget at the very top for savings. Don't plan to save what is left over, because there won't be anything left over.

I've often asked the opposite question. How do so many people spend more than they make? I've watched some of the financial intervention shows like Bank of Mom and Dad or Til Debt Do Us Part and the people featured are spending hundreds or thousands more than they earn each month. It boggles my mind that they can do that and not even be aware that it's happening.

This is a great response that I wanted to build on just a bit.

I think sitting down and forming an overview of your financial life is critical. So, get your total net worth visible infront of your eyes (that is all your assets minus debts owed). Figure out your usual expenses and income. When you have these numbers in front of you, it's easier to grasp the picture of your life.

One thing, please be honest in your budget. A lot of people tend to... underestimate how much they spend on say, food, gas, etc... I think keeping a log of your expenses for 2 weeks (ideally a full month) is a good way to precisely monitor your expenses. You can build a more honest and accurate budget then.

When you have the numbers in front of you, well it's simple to know what to do. If your expenses are higher than your income, you need to look at your expenses and ask yourself what you'd be willing to cut. Ideally you shouldn't try to cut everything at once. Do one thing at a time, cut it out for a couple weeks until you barely notice it anymore, then move to the next thing. That's important for it to be sustainable. It's akin to going on a harsh diet in one fell swing, and slowly progressing into it one new food at a time. Taking time to acclimate to the new environment is important.

When your expenses match your income, the final step is making cuts (or increasing your income) to a level that allows you to save X amount per month. The amount you want to tuck away for yourself is up to you. I'd say a good amount to aim for to start with is $500 a month. But it heavily depends on your income, to some that's impossible, to others that's a drop in the bucket. You need to figure out what your retirement needs are and build a plan to save enough to reach it.

[Like2Plan]

I take savings off the top. (Out of sight, out of mind. ) I divert a pre-determined amount for Christmas gifts/gifts and non-periodic expenses into a short term savings account. Then, whatever is left over is what we spend. If it looks like our spending rate is too high, I will tell DH and we both back off 'till next month.

[bjl584]

I pay myself first. Every pay I automatically have a certain amount deposited into my savings and investment accounts. Then, I live off the rest. It's as if that money doesn't even exist and isn't available to spend.

I did this early on years ago. This would be a bit more difficult for someone to do if they already spend more than they make. They would need to get out of debt first.

[moneybags]

I pay myself first. Every pay I automatically have a certain amount deposited into my savings and investment accounts. Then, I live off the rest. It's as if that money doesn't even exist and isn't available to spend.

I did this early on years ago. This would be a bit more difficult for someone to do if they already spend more than they make. They would need to get out of debt first.

I do this too. Also, when you get a raise, pay yourself more; don't spend it.

[LivingAlmostLarge]

Paying yourself first has always worked for us and made life easier. It makes decisions easier, I can only afford X home because this is all I have coming in. We've never gotten used to living on what we really made because we've never seen the whole paycheck.

It's unfathomable to me that we could have $7-8k/month to live on, which I am pretty sure we could if we didn't save anything. But instead we divert savings first and live on $5k/month. It is what it is. The money is gone and it's like my DH gets a salary of $60k/year. Everything else is taxes and gravy.

For raises, I wouldn't save it all, I'd save half and spend the rest.

[redtea]

Definitely writing out all of your expenses for each month is the way to start. Make sure you plan out how much money you will be making for each paycheck and then write out what you will definitely need to spend money on throughout the month. you can give yourself a certain mount to spend for things at your leisure too if you have enough. but get the important stuff out of the way first so you feel safe enough to spend on anything else.

[Gailete]

I would suggest reading the book Your Money or Your Life. It is an older book but for figuring out your needs and wants it is great. That is the problem with some spending so much of their 'income' is they are looking for something that money can't buy, but are trying to use money to do it. I've known a person that used to claimed he made $800 a week. Yeah he did that twice a year. The rest of the time around $300/week but he spent as if he got the $800 weekly. He never tried to understand what was a real want and what was a real need. Everything to him was a NEED and he needed it right now!

Until the person can really understand what they really want to make them happy and what they need in life, they will continue to spend like crazy people. Not sure if you are asking this question for yourself or for a friend, but you can lead a horse (friend) to water but you can't make them drink. They have to be willing to change.

Along with some of the other guys here, I can't figure out how people can routinely spend way more than they have coming in. One is the lie they tell themselves that they make $100,000 a year. Well after taxes and SS it is really more like $70,000 isn't it? They have to adjust their thinking to only bringing in the $70,000 and then they may realize that a $15K vacation probably doesn't belong in their budget, at least I would hope it would.

[DaisyT101]

All these information look really helpful. Thank you for posting these.

[Permanent Temp]

Well the first thing that has to happen is that they have to have some sort of epiphany. Back in 2011 I got my first well paying job as a temp and a few months in I discovered Mint and signed up as I wanted to finally have a clear financial picture of having all my accounts in one place.

The result was shocking. At the time I had debt over several credit cards and I wanted a total summary so I could figure out how to pay if off. What I learned in the process since I barely used cash was that I was spending wayyy too much on things like coffee, and eating out.

At that point. I drew up a budget for gas, food etc based on what I was spending and cut back on expenses that weren't necessary like eating out and coffee at coffee shops. I also started bringing in lunch which helped a bit.

So I guess someone has to reach the point of enough is enough and decide to do something. If you are concerned about a friend of family member you could perhaps have a talk with them and frame it based on the relationship.

I did this with my spouse and we are on the same page about financial things and check in with one another on a regular basis (our money is separate because our approaches are too different and it would cause issues we still both get the same result though so it works). I did it with my family and some still don't get it, others are inspired and taking measures to better their lives and control their debt. That's really all you can do you can't really force someone to do anything they don't want to do.

[snafu]

If you are trying to get someone aboard with getting control of their finances instead of money controlling what they can and cannot do. I'd ask them to get all their bills together and add up how much they are paying in interest each month and multiply the figure to include an entire year. STOP using CCs, put all but the lowest interest CC in the fridge freezer. Wrap a sturdy elastic band around the card as a reminder to use Only in a true emergency.

There are specific costs that are acknowledged as NEED. [rent/mortgage, utilities (heat, light, internet, basic phone), food]. 2nd tier costs transportation [car payment, operation, maintenance, insurance]. Imagine being unemployed, where to dispense $$$? List remaining bills from smallest sum outstanding to largest including interest rate. You'll recognize that as Ramsey's 'snowballin.' Pay minimum on all debt by due date, toss every cent possible to lowest sum until Paid In Full and carry on to next etc.

The goal is to get gross income, the sum that gets to the bank, to distribute 20% to savings, 50% to Needs and 30% to Wants, the stuff important to the individual.

It's important to explain this is short term pain for long term gain. If the employer offers matching funds in a retirement program it's important to grab 'free' money up to 10% of income as a starting point. Get something into Saving no matter how small. If housing exceeds 28%, the individual needs to do what it takes to bring down that cost [move, take a roommate, find a way to earn more]. Food costs are often malleable, make a menu, cook/eat at home, make/take coffee from home, take lunch to work, avoid take-out/fast food, no booze, restaurants are a big treat/reward. Cancel cable [short term] for Netflicks. Limit food category to less than 15% of net income.