Trying to cut back on your spending gets tedious when you focus on minute details. Yes, it’s important to track every dollar — but to feel anxious about spending on small purchases that you value because you’re trying to save more and spend less? That can quickly lead to budget burnout.
Preparing for and responsibly purchasing big-ticket items (from a laptop to a car to a house) is much more important than counting every last penny. Think about it. Does it make sense to stress over buying a coffee or spending an extra $1.99 to add guacamole but to have zero plan when it comes to major purchases?
Quite frankly, budgeting for coffee sucks — and it’s not worth your time or effort to pour your energy into everyday items instead of looking at the big picture and failing to prepare for big expenses.
You want to make responsible decisions on the big stuff. A few coffees won’t break the bank and deserve a place in your budget if your daily latte is truly important to you.
But buying “too much car” or “too much house”? That’s where you can run into major financial trouble.
Cutting Out Lattes Just Doesn’t Cut It
Focusing on small expenses, like your coffee fix doesn’t do much to impact your budget, cash flow, and ability to save and invest if you fail to examine your larger purchases.
If you spend $5 every single day of the year on coffee, you will spend $1,825 throughout the year. Now, that’s no small number. But perhaps all you need to do is cut your coffee consumption by half. You still get to enjoy your latte multiple times per week while also saving $912.50 per year.
Compare that to obsessing over the tiny costs and nickel and diming yourself. You’d save some more. But you’d also likely be stressed out and less happy. And the bigger issue? You might exhaust your decision-making power by constantly denying yourself a small pleasure.
You need that financial willpower more when it comes to big depreciating things, like cars and boats, etc. Let’s image you purchase a car today and lock into monthly payments of $250 for five years. That means you give up more control in the future on what you can afford to buy(and how much you can save and invest) because the $250 is already accounted for, every month, for five years. All in, that’s $3,000 a year and $15,000 over five years!
It’s a much more dramatic impact than budgeting for coffee.
The Impact of Big Expenses on Your Budget Over Time
Take this one step further. Say you spring for the extra fancy model of the car. If your monthly payments were $500 for five years because you financed a more expensive car, that’s $30,000 worth of cash that you devote to this one expense.
That’s the other thing about budgeting for coffee: you can change your mind anytime about how much you’re comfortable spending on those little things. Big purchases that you pay for over time? Not so much. You commit your future budget to being limited for years.
If you took that same (lower) car payment of $250 and invested it instead every month over five years, you would have about $17,000 assuming a 5% rate of return. Leave that money alone for 30 more years until retirement, and at 5%, you’ll have $73,500.
It’s important to think bigger and look at big-ticket items that can drain your cash flow for years to come. While cutting things like a daily latte can help you reduce costs, prioritize preparing for bigger purchases first and don’t set yourself up for failure by depriving yourself small pleasures like coffee from your favorite cafe a few times a week.
Instead of Budgeting for Coffee, Create a Big-Picture Plan
Try this relatively simple process to review your big-picture budget without getting into all the details of every single purchase:
Take your last pay stub and find the net amount (after taxes and deductions for your retirement account, health insurance, life insurance, etc.).
If you’re paid once a month, the net amount on your last pay stub is what you want. If you’re paid twice a month, multiply the number by two. This is your net monthly income.
List every single fixed expense you have and how much each one costs you, on a monthly basis. These expenses may include your mortgage, utilities, insurance, other debts to repay, taxes, etc.
Add up the monthly cost of each fixed expense.
Subtract the total amount you spend on fixed expenses in #4 from the net amount you earn each month from #2.
The difference is the amount you have to spend each month on everything else, including savings.
The best way to increase your discretionary spending (and more importantly, your ability to save), is to knock off or reduce some of the fixed expenses.
This may mean spending a couple of hours shopping for cheaper car insurance. Or, if you’re spending more than you earn each month, it may mean a change as drastic as moving to a less expensive place to live.
Here’s an example:
Net monthly income = $6,000
Fixed expenses = $4,000
Difference = $2,000
That $2,000 has to cover all your food, gas, entertainment, gifts, shopping trips, everything for the month. That includes savings and other investments outside what you automatically contribute to retirement from your paycheck.
If it’s not enough, look at your large recurring expenses and see what you can cut. You may need to sell the expensive car and get a cheaper one. You may need to reconsider major luxuries in your lifestyle that seriously drain your budget of cash to put on things that are ultimately more important to you — like being able to travel, save for a big goal, or retire sooner to spend more time with your family.
*Originally published here.
Michael G Rivas CFP® founded Bienvenue Wealth, LLC located in New Orleans, LA to offer fee-only wealth management services to successful business owners, Gen X professionals, and their families.
Contact Michael: [email protected] 504-585-7355
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