How To Fix Your Budget When Everything Feels Like a Necessity
Budgeting advice is traditionally straightforward. Needs like rent, groceries, utilities and transportation are obvious givens, but how you handle other perceived needs is less clear. Looking professional for work and other, fun things like recreational activities and meals out with friends are relative needs, but managing those costs is difficult on a tight budget.
Streamlining your budget doesn’t mean softer things don’t matter. Eliminating less essential budget items isn't necessary, but adjusting them is. Here's how to do it when you feel like nothing can be cut.
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Segment Your Spending
Social spending is a key driver for many millennials. Approximately 60% of millennials say social spending affects their ability to achieve their financial goals, according to Ally Bank. Such knowledge makes it seem like social spending should be cut.
Before doing that, it's helpful to categorize your spending. It’s wise to segment spending into absolute needs, wants and felt needs. Needs are housing, food, transportation, utilities, insurance and minimum debt payments.
Wants are similarly easy to identify; things like subscriptions and impulse purchases fall into this category. Felt needs include things like social events, gym memberships, travel and networking. Having felt needs as an expense isn't shameful, but categorizing your spending can help you identify ways to accomplish the same thing for less.
Cut Costs, Not Categories
It’s easy to think that eliminating spending on nonessential items is the best course of action during financial struggles. Reality is different, though. Ideally, it’s best to find ways to have a similar experience but for less.
For instance, if going out for dinner with friends is something you enjoy, suggest going out for lunch or brunch instead. Go for a walk with a friend and grab a coffee rather than going out for drinks. Don’t overlook the value of allocating money to experiences with friends, as that offers a high return, according to CNBC.
If you like getting new clothes to stand out at work, consider shopping at secondhand shops and buying items that work well in various outfits. Convenience spenders can operate similarly by capping their monthly spending. Such reductions can still help you enjoy what you want, just for less.
Put Boundaries Around 'Identity Spending'
Most people want to be liked, and it’s easy to justify spending to fit in. In-person events are vital for many millennials. Nearly three-quarters (69%) of millennials focus on weekly in-person events with friends, per Ally Bank.
Additionally, more than half (57%) of millennials say they give in to spending because of financial FOMO, according to Empower. Ceasing all spending isn’t the answer, as life is still meant to be lived.
A better solution is to put boundaries around identity spending. For example, limit yourself to a specific number of events each month. Or commit to spending a set dollar amount each month on new clothes. Identify what nonessential expenses matter to you and give them room in your budget. Doing so gives you the freedom to still enjoy what you want, within reason.
Identify the Problem
Budgeting is a helpful tool because it helps identify problem areas. Perhaps you realize you’re overspending, and it’s time to seriously review your expenses to determine what to cut.
However, it’s also possible that despite your efforts to keep spending in check, you're still not achieving financial goals. In that case, you may not be earning enough, and it's time to consider a side hustle, asking for a raise or monetizing your skills in another way. Just make sure not to use the additional income as a license to increase your spending in all areas.
A budget is a living thing. You may need to revisit it regularly to identify potential problems. Needs and desires change over time. Identifying problem areas on occasion can help you optimize your budget and achieve your evolving goals.
Competing needs on a tight budget often make you feel like every expense should be cut to the bone. That typically doesn’t solve the issue. Instead, review experiences you want to keep and identify ways to do them for less.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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