When people ask me how to be smarter with money, I often tell them to track every dime, nickel, and penny. That response is typically greeted with a groan and an eye-roll. Why? It’s not fun, and it doesn’t magically make money appear in your pocket.
What people don’t understand about “budgeting” is that it isn’t just about understanding where your money goes and deciding how much you can spend on drinks, food, or clothing. Budgeting is a boring term that scares people away, so let’s call it what it really is: prioritizing. It’s the process of deciding what’s important to you and what’s not.
Today, I want to show you why prioritizing is the number one thing you can do to stretch your dollar and feel like you have money to save.
Let’s Talk About Where Your Money Is Going
If you’re like most Americans, your top spending categories are housing, transportation, and food. If this is you, then I have good news! There’s nothing wrong with that. Most of us want to live in a pretty house and eat out once a week or so. We want to drive nice cars and avoid walking to work every day. That’s all very understandable.
However, let’s talk about where most Americans’ money is not going. According to the Stanford Center on Longevity’s report, most of us aren’t saving at levels that will allow us to retire fully at age 65 in our current standard of living. Yikes.
Let’s say I walked up to you on the street and asked, “Which is more important to you: having money to live on when you’re old or living in the nicest house you can afford right now?” How would you answer? Would you prioritize your comfort now or later?
This is what I mean when I say that budgeting is prioritizing. Every dollar you spend is a dollar that’s not going toward something else. If you’re low on vacation funds, where is that money going? If you can’t afford holiday gifts, can you think of other things you’ve prioritized instead?
This might sound harsh, but in my experience, people fail to realize that choosing what is important to you is the most essential, influential part of building your budget.
How to Prioritize When You’re Living Paycheck-to-Paycheck
If you live paycheck-to-paycheck, you’re certainly not alone. Roughly 78 percent of American workers do. Therefore, it would be extremely irresponsible of me to imply that saving money is simply a matter of prioritization. For many of us, saving is somewhat impossible.
However, I would urge each and every one of you to take a hard look at where your spending is going. When I say hard, I mean hard. This should make you feel uncomfortable.
Did you know that over a 40-year period, the average American spends more than $22,000 on alcoholic beverages? Think about how much that amount could be worth if you had invested just HALF ($11,000) of it over the course of 40 years. That’s an extra $275 invested per year, and at an interest rate of three percent over four decades, it would be worth double in an IRA.
What about your housing? The rule of thumb is to never spend more than 30 percent of your budget on housing, and yet most Americans spend at least 37 percent. That seven percent may seem tiny, but think about what seven percent of your salary is. If you make $40,000, that’s almost an extra three grand more than what’s recommended.
My point is this: cutting costs and prioritizing saving in your budget doesn’t have to be huge. Can you drink half as many alcoholic drinks as you do? Cut down on your housing expenses by seven percent?
Every little bit of meaningful effort counts. Decide what is important to you, then act on that, not on what people tell you to budget.