5 Steps for Building Better Spending Habits

Reducing spending can be one of the hardest financial planning tasks. You may create and try to stick to a budget and find that you are still spending more than you desire. One way to reduce spending involves categorizing your top spending categories and identifying one financially-beneficial microhabit to build over the course of a month. Let’s explore 5 steps for building better spending habits.

Step 1: Categorize Your Spending

To reduce spending, you begin by categorizing your spending during the past 3-6 months. You can use an application, such as Mint.com, to assist in categorizing your spending during that time frame. Budget categories may include Entertainment, Groceries, Dining Out, and more. You can also complete this step manually. Download your credit and bank statements for the past few months into a spreadsheet. Categorize each line item according to the budget categories you’ve created.

Step 2: Identify Your Top 10-20 Spending Categories

Once you have categorized your spending, most budgeting applications will assist you in analyzing your spending. For example, Mint.com allows you to see how much you’ve spent in various categories during a specific time frame. If you are using a spreadsheet, sort the spreadsheet by spending category to see how much you’ve spent in each category. You can then identify your “top spending” categories.

Step 3: Sort Top Spending Categories

You will then categorize each top spending bucket. You will categorize each bucket as one of the following three types:

  • Non-Negotiables: Categories in which you must spend money. Examples include…
    • Mortgage
    • Rent
    • Bills and Utilities
    • Loan Payment
  • Quick Fixes: Categories in which you can reduce spending easily, without changing your habits. Quick Fixes usually include cancelable recurring expenses. Examples include…
    • Charitable Giving
    • Subscriptions
  • Habit Builders: Categories in which you must change your habits to reduce spending. Examples include…
    • Groceries
    • Dining Out
    • Entertainment

Step 4: Deal with Quick Fixes

Cancel or otherwise deal with any Quick Fixes identified in Step 3. You can use a program, such as Rocket Money, to help you identify and cancel unused or rarely-used subscriptions.

Step 5: Build One Habit

Select one Habit Builder from Step 3. Identify a habit you can build to reduce spending in that category. For example, say “eating out” is one of your top ten spending categories. You could build the habit of only eating out on only select days of the week or opting to pick up food instead of having it delivered. Either of these microhabits could help you reduce your spending on eating out. Consider these other examples:

  • Spending Category: Groceries
    • Habits you could build:
      • Plan meals before grocery shopping.
      • Grocery shop on a full, rather than empty, belly.
  • Spending Category: Shopping
    • Habits you could build:
      • Let items sit in online shopping cart for 2 days before purchasing.
      • Only go to shopping malls 1-2x per month, during which time you can only spend a select amount of money

Select one microhabit to build. Once you have done so, identify any roadblocks that could prevent you from building that habit. Consider the above example. You are working to pick up food in order to save on delivery costs, but you know sticking to this habit will be difficult at the end of a long work day. You’re tired and don’t want to leave the house again to pick up dinner. Knowing this roadblock, you could consider picking up dinner on the way home from work. You could also identify close restaurants that you like, such that picking up food is an easier task.

Temptation bundling can additionally help with habit building. Temptation bundling is a form of rewarding yourself for doing the harder habit. For example, if you do pick up food instead of having it delivered, you could treat yourself by ordering a dessert with that meal. Then you get a small reward for keeping to your habit.

Try to remember that building habits is difficult. It won’t happen overnight, and you won’t be able to stick to new habits in every single situation. Be compassionate with yourself and take things slow. We all know the lesson from the turtle and the hare.

If you want assistance in following this system, I encourage you to reach out to our experienced financial planning team. Not only can we assist you in identifying your top spending categories and building habits, your financial plan will also come with a free worksheet that will assist you in following these steps.

By Categories: Blog, Financial PlanningPublished On: May 19th, 2023