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Why Spending Never Works Out The Way You Plan

frustrated looking womanThe lessons learned from the 2008 recession prompted most of us to seriously consider financial planning. One of the things that we kept a close eye on was our spending. In truth, those bad spending habits that we got used to became our financial undoing. We spent beyond our means by using credit cards recklessly and it cost us a lot of money. For some of us, it led to losing some of the assets that we hold dear. It meant letting our homes go into foreclosure, selling our cars and even skipping the usual entertainment expenses that made us really happy.

Thankfully, financial plans can help us curb the bad habits that led to our money’s demise. But be very careful. Even if you create the most promising plan there is, you need to be able to implement it. A lot of us started strong with our plans but unfortunately, not everyone was successful in applying it in their lives.

A plan is necessary to keep your finances under control and this article will try to analyze why your spending never worked out that way you planned it to.

Comparing your budget with your spending plan

In most cases, your spending plan is confused with a budget plan. Some articles actually refer to them as one and the same. But you need to know that they are two separate concepts. Budgeting is the first step towards financial independence and your spending plan will serve as your action plan to connect them.

Here are other concepts that will help you differentiate the two.

  • Spending plans will be more appealing to follow because it does not have the restricting image of a budget plan.

  • Budgets will tell you how much you are allowed to spend for a specific expense category. The spending plans will allow you to control that total amount to satisfy your actual needs.

  • Spending plans can help you detail your wants and needs. A budget plan is more concentrated on your expense categories.

  • Budget plans will help you define what is left for your discretionary income. Spending plans can map out where you discretionary income will go.

More importantly, your spending plan will help define the different patterns that you have in your life. You can see when your housing costs spike and when food prices go up. It can help make your future financial plans more accurate.

Reasons why your plan for monthly expenses is not working

Now that you know how to differentiate a budget from a spending plan, let us identify the possible reason why it can fail you.

It does not include everything. We’ve mentioned how this plan is actually more detailed than your budget. You have to make sure that it includes all the expenses that you usually make. This is how you ensure that it remains true to the restrictions of your budget. You do not want to end up spending more than what you are allowed to. Ideally, your purchase plans cover a period of one month. Make sure that you include your annual and seasonal expenses too.

It failed to indicate your priorities. Another reason why this plan can fail you is when you did not indicate your priorities. This is very important to keep your plan from concentrating too much on the mundane expenses that make you happy. The whole purpose of planning is to ensure that you will not miss out on all your expenses. Put the priorities high on the list and make sure you understand the factors affecting them. In fact, Moneyning.com published an article that indicates how every generation usually have different priorities. For instance, Baby Boomers lived after the second World War and it made them heavy spenders compared to other generations. Millennials witnessed how the 2008 recession crippled their parents and grandparents financially, that made them more cautious about credit – especially credit card spending.

It is not realistic. The third reason it is not working is because it is not realistic. You may want to spend a lot on entertainment expenses but when your needs dictate that more funds should be allotted for your debts, then you should reconsider your plan. Based on the data from the Bureau of Labor Statistics (BLS.gov) last March 27, 2013, the average expenses of households depend on the income. The highest 20% allott 30.2% of their income in housing costs while the lowest 20% spend 40% of their income on the same category. In terms of food, the highest 20% spend 11.4% as compared to the lowest that spend 15.8% of their income on this expense. For personal insurance, the lowest 20% spend only 2.1% – which is very low compared to the 16% of the high income earners. Obviously, the low income earners have to forego insurance to pay for more important expenses. Your spending plan should consider all of these to make it realistic and true to your needs.

It is not flexible. Lastly, your plan may not be flexible and that is the reason why it is not working for you. Most spending plans require changes from time to time – just like your budget. As mentioned, your priorities are influenced by a lot of things and this should be something that you consider carefully. As you age, your needs will change and that should prompt you to constantly look at your spending plan to see if it is still workable.

Tips to create a working plan for purchases that compliment your budget

To be a smart spender begins with a well crafted spending plan. Here are some important considerations when you are trying to make this.

  • Base your spending on your net income – not our gross. Nobody ever sees their gross income. If you base it on this amount, you will always fall short and some of your expenses will end up being unpaid.

  • Always analyze your current spending. What you are spending a few months ago may not be the same as what you need right now. Always check if your spending plan is still aligned with your goals.

  • Categorize your expenses to keep the revisions from being tedious. You can put the fixed expenses first as these are the regular payments that you constantly have to make. In most cases, the amount does not change. These include your rent, loan payments, etc. You also have the flexible expenses that are still necessities but vary in amount every month. Your food, groceries and transportation can be placed here. Lastly, you have the discretionary expenses that are the expenses that you do not need to spend on all the time. These can be your clothing, shoes, and entertainment expenses. When you have to revise your plan, you only have to look at the flexible and discretionary expenses.

  • Make sure your income is higher than your expenses. If not, you will always have to spend some credit to take care of everything. That defeats the purpose of using this financial plan. Trade off some of the expenses that you can live without so you can afford those that you need to spend on.

StatisticBrain.com shows that the average household income is at $43,000. With the rising cost of living, this is just enough for a family of 4 to live on. If you want to make your spending less restrictive, you should consider earning more or cutting back. The bottom line is to make sure that you can control where your money goes and the plan that will help you achieve that is something that you can follow consistently. If it is not working for you, review the plan to see if it requires you to make some changes.

Here is a video created by National Debt Relief to help you learn how to budget for your household.

How To Spot A Smart Spender From The Not

retailer cutting a credit cardAfter everything that we have been through, we all know the importance of financial management. This is a lesson that we need to learn if we want to keep ourselves from being in a financial crisis once more.

One of the most important lessons that we will learn in money management is how to be a smart spender. Your spending habits has the power to make or break you. Either it will bring you towards financial security or pull you down into a debt pit.

Like the holidays for instance. How can you rate your holiday spending? Did you successfully adhere to your budget or have you gotten yourself into some serious debt? If you were a smart spender, you should have been able to stay away from holiday debt easily.

But with all the marked down prices, the people going crazy over shopping and the bonus that you got from work – keeping a tight lid on your spending is easier said than done. We are living in a consumerist society after all. You can expect that everywhere you turn, you will be encouraged to buy, buy, buy!

Shopoholism explained

Compulsive buying is a real and dangerous addiction. It can ruin not just your life, but that of your family as well. Your past exploits can ruin your present and future endeavors. So you need to seriously consider if you or a loved one has the signs of not being a smart spender.

Consumer spending in the country have steadily gone up over the years. TradingEconomics.com compiled a couple of statistics that show how spending have steadily increased over time.

  • Spending increased by $187 billion from Q3 of 2012 ($10.54 trillion) to Q3 of 2013 ($10.72 trillion).

  • Spending in every quarter of 2013 also showed a steady increase: Q1 $10.64 trillion, Q2 $10.69 trillion, and Q3 $10.72 trillion.

  • Growth from ten years ago (Q3 of 2003) is at $1.79 trillion. Consumer spending in 2003 was only at $8.93 trillion.

The only time that consumer spending declined was from mid 2008 to mid 2009 – which was during the height of the recession. But after that period, people started to spend more money on various items once more.

Even WebMD.com, an authority site on medical information, acknowledges that compulsive shopping is a real and dangerous condition. Coined as “shopoholism” medical experts know that this is as real as an addiction to drugs or alcohol.

An article published on the site reveals that people who do not have control over their impulses are considered to be an addiction. If you do not have control over your shopping impulses, then you may be addicted to buying more than what you should. Here are some highlights from the article.

  • “In America, shopping is embedded in our culture; so often, the impulsiveness comes out as excessive shopping,” Donald Black, MD, professor of psychiatry, University of Iowa College of Medicine.

  • “Some of the new evidence suggests that some people, maybe 10%-15%, may have a genetic predisposition to an addictive behavior, coupled with an environment in which the particular behavior is triggered, but no one really knows why,” Ruth Engs, EdD, professor of applied health science, Indiana University. “Individuals will get some kind of high from an addictive behavior like shopping.”

  • “Impairment can occur because the person spends time away from home to shop, covers up debt with deception, and emotionally and physically starts to isolate themselves from others as they become preoccupied with their behavior,” Rick Zehr, VP of addiction and behavioral services, Proctor Hospital at the Illinois Institute for Addiction Recovery.

Source: http://www.webmd.com/mental-health/features/shopping-spree-addiction

Here is where it all gets to be difficult. Being addicted means you cannot decide for yourself if you are a smart spender or not. Those addicted are usually in denial of their condition. Someone always has to step in to tell them that they are compulsive shoppers.

Signs you are not with a wise spender

Experts suggest that people should watch out for signs that a person is not a smart spender. Whether it is you or another person in your home, you need to be able to spot the telltale signs. It goes beyond paying in cash or credit.

ShopaholicsAnonymous.org provided a compilation of statistics about compulsive shoppers in the country. Here are some of them:

  • Compulsive shoppers in 2008 reached more than 25 million in the US.

  • The Stanford University Landmark Study revealed that there were 17 million compulsive shopper in the US. Men and women are also equally compulsive shoppers. Overshopping is usually caused by poor budgeting and saving efforts.

  • Psychology Today reports that the number one reason for relationship stress is money. It oftentimes lead to separation.

  • Time reports that the credit card debt of consumers are mostly unnecessary purchases.

Source: http://www.shopaholicsanonymous.org/facts.htm

While it may be hard to spot, you can observe yourself for the signs that you are more of a spender than a saver. Here are some of the characteristics that you can observe about yourself or a loved one.

  • Having a hard time or intentionally not following rules.

  • Feeling pride when you just ripped off people.

  • Cheating in tax or financial forms.

  • Keeping purchases a secret.

  • Inability to answer a direct question without being evasive.

  • Preferring to make rules for others – but cannot follow it themselves.

  • Sense of self-righteousness.

  • Likes to hoard during sale events.

Probably the most important sign that you have a spending problem is when you spend more in credit than you do in cash. Credit cards will not give you as much guilt trip as it would when buying in cash. You need to consider these signs if you really want to end up being a smart spender and not the opposite.

These characteristics are not definitive of a compulsive shopper but you have to know the person to truly define if they are smart shoppers or not. Observe and look at other factors too. For instance, if it is keeping you from fulfilling your budget goals, then this needs to be explored further. And, being an addictive condition, it has to be approached carefully to avoid ruining any relationship.

Can you change a spender to be a saver?

The big question is this: is it possible to change a spender and make them a saver? If there are chance for them to stop being an impulsive shopper to be a smart spender?

The answer is yes. It will be difficult, but it is not impossible. Drug and alcohol addicts have success stories and shopaholics can still be saved to become savers. Here are some tips that can help you and your loved ones work through this problem.

  • Accepting the problem. This is ideally for the person with the bad habits but it goes for the rest of the family too. If there are debts already incurred, just let it go and stop blaming each other.

  • Supporting each other. Debt can drive you apart but only if you play the blame game. No matter who is at fault, you need to give each other a chance and solve this together. Fighting will only make things worse.

  • Get professional help. It can be a psychiatrist to help with the impulsive habits or it could be a financial expert to help fix your finances. Usually, the expert can give you insight and techniques that would never have dawned on you.

Solving the shopping habits will help you turn your finances around. Being a smart spender is where you can take a more action about this problem.

Here is a video from National Debt Relief that will help you lower your bills in your household – regardless if you have a spender in the family.

Analyzing American Spending Habits

personal debt meterOur spending habits are influential enough to dictate how our lifestyles will be in the future. If you really want to prepare for your future, it is evident that you have to practice proper financial management skills. That includes how you spend your money.

We made a lot of mistakes in the past and to really get over that predicament, it is imperative that we do something to stop our bad spending habits. Of course, that is easier said than done. We all have to change a lot of things if we want to correct these habits. When you say habit, it means these are activities that we do almost impulsively. That could either be borne out of necessity or simply the pleasure of the act.

Where do Americans spent their money in 2012

Before we can correct the bad spending habits, it is important to analyze the actual figures that indicate where our money goes to. The best place to get that is through the Bureau of Labor Statistics.

In September 10, 2013, the BLS.gov website released a report about how the average American spends their income. This data was based on the spending habits of consumers in 2012. Here are the important breakdown of expenses for the whole year of 2012:

  • Housing: 33% at $16,887

  • Transportation: 17% at $8,998

  • Food: 13% at $6,599 (at home 59% and eating out 41%)

  • Insurance: 11% at $5,591

  • Other expenses: 7% at $3,557

  • Healthcare: 7% at $3,556

  • Entertainment: 5% at $2,605

  • Cash contributions: 4% $1,913

  • Apparel and services: 3% at $1,736

These all add up to the whole annual spending list of the average American household in 2012. Here are other important notes about these statistics as found on the BLS website:

  • Except for apparel and services, all of these categories increased compared to the 2011 statistics.

  • Health care expenses are mostly on health insurance at 60%

  • The cash contributions refer to church, charity and other forms of donations.

  • Transportation has the highest increase in amount from 2011 to 2012 at $705 while the highest percentage increase goes to cash contributions at 11.2%

So what does these data say about our spending?

  • It reveals the top three priorities in our spending: housing, transportation and food.

  • While most people cook their meals at home, a huge expense is still being made for meals outside.

  • Having the entertainment expense below the housing, transportation, food, insurance and healthcare means consumers know how to prioritize their expenses.

  • The lower spending for apparel and services compared to the 2011 statistic could also mean a smarter spending habit.

  • Consumers are making more socially responsible spending decisions given the rise in cash contributions.

Overall, you can see that consumers have done a great job in prioritizing their expenses. It is hard to say where the debts fall into but we can be sure that the housing category mostly refers to mortgage payments – that is why it is too big. Usually, a fully paid home will only cost you the annual property tax and the maintenance costs – which will hardly merit the top spot.

Other categories that could be debt payments are apparel, services, entertainment, transportation (car loans) and other expenses. Both insurance and healthcare (which is mostly health insurance) can hardly be considered as debt payments. Food can be a part but it is only when grocery expenses are paid in credit.

Best practices when it comes to spending your money

It is hard to assume that we are all practicing smart spending habits with the statistics given by the Bureau of Labor Statistics. However, it is comforting to know that the important expenses can be found on top of the list. This goes to show that debt ridden or not, we are not being irresponsible when it comes to our spending priorities.

To help keep you from wrong spending habits, here are important tips that you can follow:

  • Practice budgeting. You can ensure that you will have the funds put aside for all the priority expenses that you have.

  • Limit your credit spending. Adding to your debts is not really a good idea especially if you hardly have enough to pay for your expenses. Spend in cash as much as possible and if you have to use your credit card, make sure it is included in the budget. That way, when the billing statement comes, you know that you have the funds to pay for it immediately.

  • Create a payment plan for your debts. Debt payment take up a huge portion of your budget and you want to make way for the more fun expenses – at least until after you have boosted your savings.

  • Grow your savings. Speaking of savings, it is very important to have adequate savings for your emergency fund. That way, when your income is compromised, you can at least afford to spend for your priority expenses.

  • Think before you spend. In the data provided above, you notice that the other expenses make up a huge part of the budget. It is hard to say what these expenses are but we hardly see any other important category that is not indicated already. That leaves us to assume that these expenses may be discretionary or variable expenses. To be on the safe side, just be very careful about where you put your money. Even if it is something that you can afford, you may want to opt to grow your savings instead.