by | Oct 2, 2020 | Behavioral Finance

“A Simple Budgeting Alternative”

I’m not sure I’ve ever met a client who genuinely got excited about the idea of creating and following a budget.  I think for so many people, a budget feels restricting and cumbersome to keep up with.  But, have you ever wondered what it would feel like if you were to look back at your credit card or debit card statement and actually be excited to see where your money went and what you spent it on?  There are frameworks which can help you get there.  They can preserve the things in life that you enjoy spending money on and cut your overall spending at the same time.  We will explore one of these frameworks in this week’s post.   “Most people have been taught to categorize spending by WHERE we spend it (housing, food, travel, going out with our friends, etc) and it doesn’t tell us if it helped us live a more enjoyable, fulfilled life today.”   One of the most beneficial frameworks we have seen in use over the years is Keep, Cut Back, and Eliminate.  The Keep, Cut Back, Eliminate Framework is a way to categorize our spending based upon the life fulfillment you get out of spending your money. Here are the categories:   The KEEP category: These are the things we spend money on that we either need to spend money on to live or that we want to keep spending money on because it gives us great life fulfillment and enjoyment. Alternatively, they may even be things that help to further build our income. Now, these are things that make us feel fulfilled or reduce our stress not only in the moment, but also in retrospect.  Looking back even 30 to 90 days we still feel great about these purchasing decisions.   The CUT BACK category is where we’re going to start to find ways to save money.  Because we don’t want to save money on the things we put in the KEEP category, the CUT BACK category is a way to find savings by either doing something less often or doing it in a way that we can get the same experience but for less money. The example I always like to point to is let’s say that we’re going out to dinner or drinks with our friends. Maybe there’s a way to order one less course or one less drink but still preserve the experience of hanging out with our friends. That would be something we could cut back on there.   Finally, the ELIMINATE category is where most of our savings opportunities will come from. These are the things that when we look back in retrospect, they made us feel guilty or regret that we spent money there or at the very least we’re just apathetic. They did nothing at all to help us enjoy life or reduce our stress. These are the things that we want to cut out of our lives altogether.   Knowing the categories, it’s now time to get results: Here’s an exercise that will help you slash your spending and still enjoy your life.
  1. Pull up your last bank account or credit card statement and look through the individual transactions.
  2. Make note of the things that put a smile on your face. Those items belong in the KEEP category. Circle them or highlight them in green.
  3. Cross off or highlight in red the things that you regret or feel guilty about spending in retrospect. These are the things that we’re going to outright ELIMINATE from your spending.
  4. In future months you can work on items in the CUT BACK category once you feel all of your elimination items are taken care of. This category can take more time to come to agreement on so it’s nice to take care of KEEP and ELIMINATE first, to ensure some quick progress is made.
  Note: It is not for anyone else to decide what money well-spent means to you.  How do YOU feel about it?  This is not about your friends, parents, or anyone else. This is about how YOU feel about it. When people go through this exercise, even in one month, they find hundreds of dollars or even thousands of dollars depending on their level of spending. So, take the 10 minutes to do this exercise and find hundreds of dollars of spending that you don’t even need to spend and still preserve the life you enjoy today.
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Van Gelder Financial