Most of the money you earn every month goes toward a set of standard expenses. These may include mortgage or rent payments, utilities, student loan bills, and car payments.
When you’re looking to rein in your monthly spending, these costs can be challenging to adjust on the fly. But discretionary spending is a different story. Costs such as restaurants, entertainment, shopping, travel, and even that daily cup of coffee all fall into the category of nonessential monthly costs.
If you’re looking to build your money management skills, the best place to start is with your discretionary spending. Here are four tips on how to track and improve this important aspect of your financial management.
1. Start using a money management tool.
If you want to make a change to your spending habits, awareness is the best place to start. A money management tool can help you track every expense that hits your bank account, giving you a starting point to understand your discretionary spending.
Your money management tool will offer a high-level view of your total monthly cost of living in relation to your incoming income. Using this tool, you can figure out whether you’re spending more than you save and set goals to scale back your spending.
From there, you can look specifically at discretionary income to identify trends and opportunities for improvement. For consumers who are serious about changing their spending habits, a money tracking tool can be the first big step forward toward better financial literacy.
2. Break down spending by category.
Any good money management tool will give you the option to break down purchases and transactions according to category. This is important, because discretionary spending is an umbrella term for a wide range of expenses that are all deemed nonessential.
A categorical approach will help you see how much you’re spending in each area—and you might discover some interesting insights. A daily cup of coffee, for example, can add up over the course of a month.
With category-specific totals to view, you can approach budgeting decisions based on which changes might be most realistic for you—and/or how you would like to prioritize your discretionary spending.
3. Identify opportunities to cut back on costs.
A category-based view of discretionary spending could reveal some jaw-dropping trends about how much you’re spending on certain types of costs. You might realize, for example, that the high costs associated with restaurants and takeout dining aren’t equivalent to how much you value these dining options.
You might also discover that you’ve piled up a number of different subscription-based streaming options, even though you only use one or two of them on a regular basis. These services you're not taking advantage of could represent a prime opportunity to cut costs—and create more space to prioritize other financial goals, such as contributing to savings.
4. Consider placing discretionary funds into a separate bank account.
If your discretionary spending constantly goes beyond your budget—and even takes money away from necessary expenses—you might want to consider placing discretionary funds into their own bank account.
Bills can be paid through one account, and your flexible spending can come from another account that is funded with your monthly budget allotment. You can even consider only using the debit card attached to this account to save yourself from building up credit card debt.
This is one reason consumers can benefit from opening multiple accounts—such as a checking and a savings account—to manage your access to, and use of, these funds.
When you spend smarter, you save better.
High discretionary spending is often one of the biggest roadblocks to building up a consistent savings routine—but it’s a hurdle you can overcome! If you can get your nonessential monthly spending under control, you can open the door to better financial wellness and stability.
Discover more tips for managing discretionary funds in our e-book, A Complete Guide to Budgeting.
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