In the end, personal finance is a simple equation. On one side is everything that you earn. On the other side is everything you spend. If the spending side is greater than the earning side, you’re in trouble.
Of course, there are many factors that influence our financial success in life. But none of them is so powerful as our spending. Nine out of 10 people who struggle financially spend too much money on unimportant things. Spending is the one area of our finances that we have complete autonomy over, and yet it’s the area where we find it most difficult to exercise self-control.
If you want to master your money, you’re going to have to master your spending. A lot of your spending has to do with maintaining your lifestyle. Unfortunately, our culture has made excessive lifestyle spending seem like such a normal thing that it can be difficult to see when your spending is getting out of control. So today, we’re going to examine five warning signs that will tell you that you need to get a grip on your spending.
1) You don’t have a budget
If you don’t have a written budget that dictates how you handle your money every month, you’re almost certainly spending too much money on inconsequential things. Why? Because money is like water: If you pour water into a well-constructed plumbing system, it’s going to flow to exactly the place that you intend for it to go. If you pour it out without anything to catch it, though, it’s going to flow out everywhere and make a mess.
If you don’t have a budget to direct your spending every month, you end up spreading your money around willy-nilly. You have no way to tell if you’re spending too much on eating out, buying clothes, going to movies or similar things. And in that situation, when there’s no accountability, the tendency is always to overspend. If you want to control your spending in a way that will maximize your financial freedom and help you achieve your long-term goals, building a good budget is absolutely essential.
2) Your debt is growing
Debt is the millstone strapped around the neck of the modern consumer, dragging you deeper and deeper into financial ruin. Debt is a form of financial slavery, and it’s never a good idea to borrow money for consumer goods, or even things like cars and education. But we’re not here to beat up on you for having debt today. If you have debt, your financial muscle needs to be focused on paying it off. But overspending makes it difficult to do that.
Unless you pay off your debts, you’ll never become financially successful. So fighting for financial freedom should mean that the balances on your debt get smaller and smaller each month as you pay them off. But if your total debt load isn’t shrinking — and especially if it’s growing — it’s a sure sign that you’re spending too much money. The first step in getting out of debt is getting rid of the credit cards and other instruments that allow you to run up more debt. The second is cutting your lifestyle spending so that you have extra cash to begin paying the debt off quickly. If your debts aren’t disappearing, chances are that your spending is still out of control.
3) You’re running out of cash
It seems like it should be abundantly obvious: If you find yourself running out of cash or unable to pay certain expenses on time, you’re probably spending too much money. But many people don’t make this connection. They see their failures to cover their expenses as the result of special or unexpected circumstances that come up from time to time — a dentist bill here, a car repair there — and fail to see that the true culprit is their overspending.
Things are going to happen in life. Little expenses are going to crop up pretty regularly, and big ones will wallop you every now and then. Small expenses can be planned for with a little bit of foresight and strategic budgeting. Big expenses are the reason why it’s important to maintain a good emergency fund. But if you find yourself unable to budget ahead of time for semi-regular expenditures and to save up for emergencies, that means that your day-to-day spending has gotten too high. The needs of next month and next year should be just important in your budget as the needs of today and tomorrow.
4) Your net worth isn’t growing
One of the exciting things about getting older is reaping the fruit of your labor throughout life and watching your net worth grow. Unfortunately, almost half of Americans today aren’t growing their net worth at all. Why? Because they’re spending too much money on lifestyle to grow wealth and prepare for their long-term futures.
True financial success requires looking years or decades down the road, and preparing to leave an inheritance for future generations. We do that primarily through saving and investing. The more you save and invest (and the more debt you pay off), the more your net worth grows. Once you’ve paid off your debts, a certain amount of your income every month needs to be dedicated to long-term wealth building. But many people fail to do that because of their out-of-control spending. If you can’t track monthly growth in your savings and investment portfolios, you’re probably spending too much money on other things.
5) You’re not giving
I’m more passionate about this point than anything else: God’s people are meant to be givers. If you’re not tithing regularly to your church and giving to help people in need, it probably means that you’re spending too much money on other things. Giving is one of the most important things that we’re called to do — it’s part of God’s Master Plan for your money — and failing to give means failing with your finances.
I can’t tell you exactly how much you should be giving — that’s between you and God, and it’s going to depend a lot on other factors in your life. What I can tell you is that for me, if I’m spending more money on luxury and lifestyle than I am tithing and giving, something is out of balance. And whatever your situation is, if you find yourself wishing that you could give more, you probably need to take a hard look at your spending habits and see if something needs to change.
These five warning signs are key indicators that your spending is out of control, but there may be others. We’d love to hear from you — jump into the comments section and tell us about how you measure your spending and how you know when it’s getting out of control.
Photo by Sung Soo Lee. Used under Creative Commons License.