When you’re trying to improve your financial situation, creating and sticking to a budget is an essential step. But what if you’re unable to stay within your financial limits? The first area to look at is your unnecessary spending. Overspending on non-essentials is an easy habit to fall into, and can lead to personal, relationship, and money problems.
At Remitly, we support our customers in making smart financial choices for better quality of life. This guide will teach you how to reduce unnecessary spending so you can have more money to spend on what really matters—no matter where in the world you choose to live.
What is unnecessary spending?
Unnecessary expenditures involve the purchase of non-essential items一items you don’t need for daily life or to meet your financial goals. Examples include entertaining friends and relatives, eating out, paying for TV subscriptions, or using taxis instead of public transport for your daily commute.
Understanding the difference between your needs and wants will help you better define the concept. Needs are things that are essential for daily life, such as food, water, healthcare, education, and rent or mortgage payments. Pretty much everything else falls under the category of “wants.” These may be things that will improve your quality of life, such as a new phone, a bigger car, or a vacation, but they are things you can live without.
Wants can also be described as basic needs of a higher standard. For instance, clothing is a basic need. However, if you opt to buy designer wear instead of generic, it becomes a want, because you’re going beyond the minimum you need to survive.
Why do we overspend?
Spending money is both a psychological and emotional issue. Consumers buy items to cope with negative feelings, trigger the release of dopamine (the feel-good hormone), or gain social acceptance when they follow the trend to fit in.
Let’s look at some of the most common triggers of unnecessary spending:
- The desire for a higher quality of life: it’s more comfortable and convenient to hail a taxi to work than to take the train
- Scarcity mentality and fear of missing out (FOMO): when you assume that if you don’t get an item today, it will cease to exist
- Stress and anxiety: some of us respond to emotional stress by buying things, because this can provide a distraction or a dopamine hit
- Boredom may lead to activities such as scrolling through Amazon or visiting the mall, where you’ll be tempted to buy items beyond your budget
- Retail therapy: a term referring to the mood boost that some people get from shopping or buying things
- Social media and peer pressure: you may feel like you’re missing out on the best and the latest trends, triggering the need to “keep up with the Joneses”
- Vacations: we tend to overspend in the holiday seasons due to a relaxed mindset and greater exposure to marketing—think Black Friday
- Unexpected cash: if you get extra tips or an end-of-year bonus, you’re more likely to think of it as “extra money” and spend it on something you don’t need
Strategies to prevent unnecessary spending
Gaining better control over your spending habits prevents unnecessary spending and can help you live within your means. But it’s easier said than done, especially if you are used to treating yourself or your family members regularly to non-essential items. Below are six practical strategies you can employ to reduce overspending.
1. Create and stick to a budget
Start with the three Ps of budgeting: paycheck, prioritize, and plan. This will help you create and stick to a clear financial plan for managing your income and expenses. Start by understanding your paycheck. Write down your after-tax income一this is the money left after paying all state and federal dues, insurance fees, and 401(k) retentions.
Next, prioritize necessary spending and calculate your minimum essential expenses each month. Plan your spending using a budgeting system like the 50/30/20 or 70/20/10 rule, outlined below. You can make sure you stick to your plan if you automate your savings by setting up a standing order at the bank to send money to your savings and investment channels each month.
2. Implement the 50/30/20 and 70/20/10 rules
To create and stick to an achievable budget, you also need a workable budgeting system. The most popular are the 50/30/20 and 70/20/10 rules, which guide you on how to allocate your after-tax income.
- The 50/30/20 rule: Allocate 50% of your income to needs, 30% to wants, and 20% to savings and debts. If you earn $100,000 USD, allocate $50,000 USD to needs, $30,000 USD to wants, and $20,000 USD to debts and savings.
- The 70/20/10 rule: Following a similar system, you’ll allocate 70% of your earnings to essential living expenses, 20% to savings and debt, and 10% to your unnecessary spending budget. This system is better if you find that 50% of your income is not enough to cover your daily needs.
3. Use a savings app to track expenses
There are lots of free apps that can help you stay on track with your budget and savings goals. Enter everything you spend into the apps to get a breakdown of where your money goes and how much of your allocated budget is left for non-essentials. Here are some of the most popular budgeting apps:
- EveryDollar
- NerdWallet
- Honeydue
- Rocket Money Bills & Budgets
- Revolut
- Empower
- Pocket Guard
- Monarch Money
- YNAB
4. Refresh your budget
It’s a good idea to update your budget to reflect life changes. Plus, after a few months, sticking to your budget can become routine and boring, increasing your chances of deviating from the plan. You need to keep things fresh in order to stay motivated, and to keep up with any economic changes.
Reasons to refresh your budget include everything from shifts in personal circumstances, like marriage, divorce, or a new baby, to wider economic events, like inflation or recession. Consider renewing your budget if you are relocating to a new state, changing your job, buying a house, or having a child. Also consider the effect of temporary situations like health issues, holidays, or even earning an extra bonus at work.
5. Reduce monthly expenses
Statistics show that although 74% of Americans have a monthly budget, 84% of them exceed it. 44% of people who go over their budget use credit cards to cover expenses, putting themselves into debt. You’re not alone if you struggle to stick to your monthly financial plan. Here are a few tips to help you reduce your spending:
- Set a realistic budget for unnecessary expenditures to fulfill your emotional and psychological needs, and boost your mental health.
- Set up standing orders to automatically deduct contributions to your retirement, savings, and investment funds.
- Avoid credit cards. If you must have one, choose lower and budgeted-for limits.
- Avoid transaction costs such as ATM fees, if possible. You’ll notice that $5 USD transaction fees add up quickly.
- Reduce delivery costs. Online shopping is convenient but it comes at a cost in the form of delivery fees. So, meal plan and schedule your grocery shopping accordingly, to reduce the number of times you shop online, reducing your delivery fees to a workable minimum.
- Compare brands to find the best deals without compromising on quality and save some money.
- Avoid meal takeouts and dining in whenever possible. It’s estimated that one home-cooked meal costs about $4 USD, while take out will cost $16 USD at an affordable restaurant. This sets you back $13,000 USD annually.
- Plan what to do with unexpected cash if your workplace offers bonuses, tips, and overtime.
- Keep yourself financially literate and safe in order to avoid losing money through scams or fraud.
- Explore zero-based budgeting if you’re consistently unable to stick to your plan.
6. Try mindful spending techniques
Mindfulness is a term you may have heard in yoga class, but it basically means being thoughtful and intentional about what you do. When applied to overspending, it means that you should stop and think before making purchases. This can be a useful technique for overcoming the habit of emotional spending.
If you’re an impulse shopper or engage in retail therapy, try to recognize the emotional state that pushes you to buy things. Before rushing to the store, identify your feelings and seek alternative coping mechanisms. Try exercising, meditating, relaxing, or socializing instead of shopping.
If you’re considering a big purchase, use the 30-day rule: give yourself a month to think before spending on something outside your budget. This ensures that you have enough time to consider whether it’s something you really need and will use, and allows any emotional triggers to fade before you make the decision.
The benefits of financial control
Creating and sticking to a budget gives you financial control, helping you live a comfortable life while also being able to invest, save, and have enough money to send back home to your family abroad.
You’ll enjoy long-term benefits such as a more secure future, reduced financial stress, and better preparation for emergencies. By controlling your spending, you can stop living paycheck-to-paycheck, avoid debt, and save for a comfortable retirement.
Unnecessary spending is detrimental to your health, relationships, and future. Follow the strategies above and prioritize your needs over your wants in order to ensure better financial health and a more comfortable lifestyle. Check on your budget regularly and analyze your progress every three months to see areas that you need to improve and optimize to better manage your finances. Finally, don’t forget to congratulate yourself for every step you make toward better financial health.
FAQs
How do I identify unnecessary spending?
Ask yourself whether you really need something before buying it. Unnecessary expenditures are purchases you make for things that aren’t essential—for example, TV subscriptions. They could also be a more expensive version of something you need for daily use. For example, you need a house to survive, but buying a big house in an expensive neighborhood might be unnecessary.
What is unnecessary spending called?
In the workplace or in accounting terms, experts refer to unnecessary spending as discretionary expenses.
How do I stop non-essential spending?
Know your after-tax income, create and stick to a budget, choose a budgeting system, use a savings and budgeting app to streamline the process, and refresh your budget when necessary to reflect economic and personal changes.
Also, know your triggers for overspending and work on solutions. If possible, enlist an expert to help you.
What are the signs of poor financial management?
Overspending, living outside your means, failing to track your budget and expenditures, and high levels of bad debt are signs of poor financial health.
Is overspending an emotional issue?
Yes. Unnecessary spending is often caused by psychological and emotional triggers such as stress, peer pressure, scarcity mentality, anxiety, and boredom.