How Your Bank Balance Controls Your Spending
Are you an obsessive bank balance checker? That’s a bad habit that you should probably replace with a few good habits I’d like to tell you about.
When you obsessively check your bank balance on your computer, telephone or at the cash machine, the number you see influences your behavior.
A example from the real world:
Companies design the timing of entire promotional campaigns around payday. They understand that your reaction to that cash hitting your bank account makes it much more likely for you to make an important, or indulgent, purchase in that moment.
Month on month, your spending follows the same pattern, with a bunch of purchases immediately after the cash hits your account, followed by gradually increasing austerity as that number dwindles.
By the end of the month you’re eating pasta and stale bread and trying to avoid using your payment cards because you know you’re just digging a hole that you’ll have to get out of later.
If you recognize yourself in the description above, and your bank balance is affecting your spending in this way, then you have a problem. You can’t claim to be controlling your spending when something as arbitrary as your available cash changes your expenditure on a moment-by-moment basis.
How can you prevent your bank balance, or available cash, from influencing you? After all, a week or two of self-imposed deprivation means you’re crying out for some kind of reward for good behavior. This makes controlling yourself when payday arrives very difficult.
Unfortunately, that reward is the reason you need to exercise restraint at the end of the next month.
These reactions are natural and perfectly human, but they’re counterproductive and I’d like to suggest a few strategies or tricks you can use to get out of this rut.
The One-Month Escape Plan
During those days or weeks when you’re holding back your spending, you should take the time to decide exactly what you’re going to spend money on once you have it.
Plan it to the last cent.
Go through a one-month budgeting exercise and line up every payment you can’t avoid, such as rent, utilities, insurance and loan repayments.
Download a meal planner and plan every meal for the next month. Then make a shopping list and plan every purchase of food for the coming month, in four separate grocery trips. Only buy exactly what you need to make the meals you’ve planned.
Cut out alcohol, cut out cigarettes. It’s only one month, surely you’re capable of that?
Once you’ve done all this, look at what’s left. It should be better than what will be left at the end of the current month because you’re planning the spending without any luxuries at this point.
Let that number, the one that doesn’t have you living hand-to-mouth for a week, be your motivation. Your reward for controlling your spending for the whole of the next month will be the relief at not having to worry about your bank balance for a full month.
Hopefully that’s enough to break the cycle of payday impulse spending. You should then look at the other strategies below to solidify this new position, and work your way up to creating a proper annual budget and financial plan that gets you to a more comfortable financial position.
The Regular Budget
The budget you designed above was a cut-to-the-bone recovery budget. It’s not actually sustainable in the long run.
For several reasons, the entertainment line in your budget is one of the most important. You want the habit of budgeting and controlling your spend to be sustainable over the long term, and that won’t be possible if it demands too much self-control of you.
If you like a drink from time to time, plan it and budget for it. That way you can know when you buy that bottle of wine of round of drinks that it’s something you’ve earned. You’ll also know it won’t knock your budget off target, so you can properly enjoy it without additional stress.
Your regular budget needs to be something that sets aside money for an emergency fund, a savings account and repayment of any outstanding loans, but it needs to do this without demanding ridiculous effort of you.
The Financial Plan
A financial plan is not the same thing as a budget.
A financial plan has a beginning point and an end point. If your starting position is a car loan, a chunk of student debt, a credit card balance and a monthly routine that consistently makes things worse, then the financial plan should provide you with a way out of that situation.
By the end of the financial planning period, you should ideally see a way out of debt, the creation of an emergency fund and a path towards growing a savings account that allows you to invest in the things that are important to you.
Financial planning is a little tricky – it is sometimes helpful for someone other than yourself to take a look at your finances to see where you can change things. It also requires the buy-in of the entire household because it usually requires changes to quite a few habits and routines.
A driving metaphor: If the budget tells you how to drive the car, the financial plan tells you where you’re going with the car.
Financial planning doesn’t just involve controlling your spending, it can also include renegotiating loans, setting up extra income from new sources and changing your home or car.
The Investment Plan
If you’re fortunate and you’re not (or no longer) trying to dig yourself out of a difficult financial situation, but have sufficient savings that keeping them in a simple savings account is inefficient, then you’re looking at placing your hard-earned cash in ways that protect it and allow it to grow.
This is a whole new area of study and includes subjects like:
- Savings and investment accounts
- Property investments
- Financial escape velocity (how much you need to stop working)
- Inheritance considerations
It’s a vast subject that I’ll cover at a later date because it’s not the core subject of this website.
In general, this entire area falls under the general heading of good problems to have.