An idea I beat like a drum here at The Incremental Life, as well as in my coaching and teaching, is that the single most effective way to achieve your goals is through enacting behavior change. Behavior change isn’t easy—letting go of bad habits and embracing good ones is among the most difficult of human endeavors. But the truth remains that for us to experience the results we want over the long term we must change what we do and how we do it.
Habit change is central to long-term success when you’re working to get your finances in order. It’s relatively easy to make small changes for a short amount of time—an important first step—but when working toward long-term change the harder part is making those changes stick and then building upon them.
The idea behind The Incremental Life is making these small changes and sticking it out until they become habits, and then make more small changes. This is often called habit stacking, and it’s one of the best ways to foster long-term growth and success.
When you’re looking at your budget, much of what’s going on is a set of practices and habits that have developed over time. These habits continue out of sheer inertia more than anything else. Getting your spending habits under control means changing how you spend that money. A great way to start changing your spending habits is to place caps on that spending.
Placing caps on your spending is a nice exercise that helps you take in a broad view of your budgeting practices. The goal is to find areas within your budget where you’re overspending or where you can find some wiggle room to cut down on your expenses in certain categories.
It doesn’t matter if your goal is to get out of debt, save for a vacation, or start setting aside extra money in savings—implementing spending caps will help you take the first steps toward changing how you spend your money.
4 Ways to Cap Your Monthly Spending
1. Place a general cap on the entire budget.
Let’s say your family’s monthly income is $4,000. First, take a good look at your current budget category allocations and your spending habits to determine how much you’re actually spending on average each month. Next, see where you can trim your spending, especially in categories such as groceries and entertainment. Be sure you take into account how much you’re giving to charity and stocking away for retirement and college—these are part of your monthly outflow as well. When you’ve trimmed all you can, you may be able to get your total spending down to $3,600—a savings of $400 per month.
2. Place caps on specific budget categories.
Work your way backwards toward spending caps by limiting spending on specific line items within your budget. Look at how much you spend on certain budget categories and see where you can trim the fat. If, for instance, you’ve been spending an average of $800 per month on groceries, see if you can make cuts and get it down to around $675 or so—$125 worth of savings each month. Once you’ve looked over your entire budget, you may be able to shave off a nice chunk of money from your total monthly expenditures.
3. Place attempted limits on budget line items.
Though not the same as implementing direct spending caps, another approach is to experiment for a month or two and see how little you can get by spending on certain types of expenditures. For instance, let’s assume you spend about $160 on gas for two cars. Your habit may have been to fill up all the way then your car runs low, but instead you could make the attempt to spend no more than $140 on gas for the entire month. This equals four visits to the gas station totaling $35 each—two for each car. Instead of filling up all the way, stop when the pump hits $35, then see how far you can get on your partially filled tank. I’d lay odds that you’ll begin watching your driving habits a bit more closely, making sure you’re combining many errands and tasks into single trips in an effort to stretch your gas through the entire month.
4. Place temporary moratoriums on specific budget line items.
Instead of implementing specific spending limits on all or some of your budget, you may be able to better reach short-term financial goals through temporarily cutting spending altogether on certain line items within your budget. Line items you can consider cutting could be things like eating out, coffee runs, dry cleaning, high-end cable packages—anything that might not be part of your family’s basic necessities. Many families can save several hundred dollars in any given month by temporarily getting rid of non-essential extras.
Use Cash Envelopes
The best way to control your self-imposed spending limits is to start using cash envelopes for the budget categories for which you set those limits. Don’t over think this, using cash envelopes is easy.
In one of the examples above, I proposed a $675 monthly spending limit for groceries. Using a cash envelope in this instance is as simple as withdrawing $675 cash out of the bank, placing it in an envelope marked “Groceries” and then using that cash to purchase nothing but groceries for the entire month.
If paid every two weeks, it might be necessary to split up the $675 and fill up the envelope with $337.50 two times during the month. Either way, when the envelope is empty—when the $675 is gone—then grocery spending is done.
Carry this cash envelope implementation across several budget categories where practical and you’ll find your spending habits rapidly altering. When you can see the money emptying out of the envelope you become much more aware of how much your spending. When your envelope gets down to the last $20 or so, I guarantee you’ll be very judicious about how spend it.
Save and Spend Wisely
This is the flip side of building disciplined spending caps. Not only do you have to be intentional about changing your spending habits to free up all this money, but you must remain intentional about the use of that money once it’s free. If your plan was to save for retirement or pay down your debt, then choose to be disciplined and stick to that plan.
Have you ever used spending caps to get and keep control of your budget? Please share your story and ideas in the comments.