FinanciallYou

I’ve been meaning to write a follow up to my recent blog about how to analyze your spending history to help you avoid your spending triggers when I came across this article on shopping habits by Charles Duhigg.  While the article primarily focuses on how your purchase patterns can really betray you;  providing the companies with data that allow them to better target market to you, what I found most useful was the discussion on “habit loops” (on page 8) and how with a little reflection and tracking you can fight your bad habits and foster good ones.

First I think it is important to admit that we all have triggers in our lives that cause us to spend when we shouldn’t.  It may be a sale, a particular store, some particular item i.e purse, shoes, gadget etc., but we all have them.  Triggers tells us that we really need it and we need it now.

A trigger could also be something small like the obligatory 2-3 cups of coffee, lunch everyday, or drink after work.

Regardless what our trigger is,  spending on these “needs” leads us to overspend.  Even if you are not overspending, knowing the details of your habits can help you find more areas for savings.

So how do you start?  First you need to figure out what are the things you are overspending on (reward in the habit loop)  and then what are the triggers (cue)  causing you to want to spend and what routines you can change to break the loop.

So the first step is to identify the bad habits that are causing you to overspend. To just balance your budget you don’t really need to know this information. However, knowing it will allow you to target some specific habits (and break the habit loop) that may be the cause of your overspending.  I like to give the following exercise to many of my clients and the results have always been enlightening:

1. Draw up what you think you spend in various categories in a month.  You can be broad or very detailed, but your list should at a minimum contain the following:
   • Housing
   • Phone
   • Transportation – including transit, gas, maintenance, insurance
   • Travel
   • Gifts
   • Food – grocery
   • Food – eating out, including alcohol. It may be helpful to breakout lunches and dinners
   • Clothing
   • Child care
   • Household items (sometime grouped with grocery)
   • Pet care
2. Find your credit card and bank statements from the past year – pick at least 3 consecutive months, I like to use September to November because it doesn’t have too many holidays or vacations which skew your spending pattern.  Based on the categories you have came up in 1, total what you spent in each of the categories and then divide it by 3 to get your average spending per month.  Some credit cards and bank statements now helpfully divide the categories up for you so it won’t be such a chore and should only take about an hour or two to calculate.I suggest using old statements rather than tracking your spending going forward as it gives a real picture of spending, and does not allow your knowledge that the spending will be scrutinized to alter your behavior.

Now look at the difference between what you thought you were spending and what you actually spent.  They are not the same are they?

If you are not currently overspending (i.e spending more than your take home pay) this exercise will highlight areas that may lead to further savings and help you pay down your debt sooner or save more each month.

If you are currently overspending then this exercise will highlight categories where you need to change your habits.  So dig a little deeper.

Digging  Deeper

Are you overspending on small items like coffee?  These items are insiginicant individually but can have large cumulative effects.  $2 spent each day on coffee for the year is $500.  Would you buy $500 of coffee? Can you buy one cup of coffee instead of 2 cups a day?   Why is that you are buying coffee?  Is it a social need, or an excuse to get out of the office?  Dehigg’s article describes a simple exercise you can try to determine if there is another cause for you habit that you may not be aware of.

What about developing a new habit of bringing coffee from home?  Are there things you can do to create a new cue?

In an upcoming post I will list some tricks that I have used and those that my clients have shared with me that may help you develop a new habit and reduce your overall spending.

Put simply, the trick is finding a way to give yourself the reward you actually want just without spending as much and not making yourself feel deprived.