How to Plug Leaks in Your Budget
"Wait, where did all my money go?!"
Instead of viewing your bank account with shock and annoyance, you can avoid the panicked feeling of having no money with one simple strategy: identifying budget leaks.
Creating a spending budget is often well-intentioned, but it doesn't always stop money from disappearing with little warning. Spreadsheet aficionados may know where each penny is spent, but the average Mint user is likely a little more apathetic.
For those who can't wait for the next payday to cover expenses, it may be time to figure out how to plug the leaks in your budget.
Identify Your Spending Threshold
Jackie heads into the checkout aisle at the grocery store and sees the rack of magazines. She thinks to herself, "Well, it's only $4.50," and throws the magazine down with her pile of food. A few hours later she's out for a walk and grabs a latte, once again thinking, "It's only $5."
Needless to say, it's easy to make this spending cycle repeat itself over and over, multiple times a day.
Identifying a spending threshold is an important part of finding the leaks in a budget. Most -- if not all -- people have a set amount of money that simply doesn't sound like much. Whether it's $5 or $50, they're comfortable spending their threshold limit without thinking.
This small amount can add up quickly during a day, a week, a month and certainly a year.
If Jackie spends $10 each day without thinking, she'll be out $3,650 a year. She may be able to afford spending $3,650 on mindless purchases, or maybe she'd rather put it toward funding an individual retirement account, investing in an index fund or even taking a really nice vacation.
Identifying a spending threshold often leads to finding a common budget leak: "the latte factor."
Traditional Leak: The 'Latte' Factor
The Latte Factor swept the personal finance community after the publication of David Bach's book "The Automatic Millionaire."
The concept is simple and refers to a small amount of money spent regularly on an unessential item. For some, the latte factor is literal -- a $5 cup of coffee each day -- while others may be spending the money on happy hours, magazines, candy or eating lunch out each day. It's a manifestation of not understanding a spending threshold.
Some diligent budgeters itemize their latte factor into a budget, especially if they find spending $100 a month on coffee is a worthwhile investment. Others indulge in the latte factor without considering the ramifications on their budgets.
The easiest way to identify a latte factor is to spend a month tracking pennies. Literally.
Write down each cent spent during a one-month period, and track mindless or unnecessary purchases. Determine if those need to be accounted for in a budget, or if you can shift your current funds around to cover those expenses.
Uncover (Food) Waste
Throwing a few dollars around a day can add up quickly -- but throwing away dollars on unused products may be even worse.
Some budget leaks are directly related to poor shopping habits, especially when it comes to perishable items. Groceries are an easy spot to be springing a consistent budget leak. In fact, a 2012 National Resources Defense Council study found the average American family throws away about 25 percent of food and beverages purchased. This could mean $1,365 to $2,275 a year for a family of four.
Americans can combat this blatant budget leak by planning out meals, sticking to a shopping list and only buying what will be consumed during a week. If food won't be consumed, then freeze it. And don't forget doggy bags for meals at restaurants.
Interest Rates on Debt
Debt runs rampant in America. From student loans to consumer debt, it's hard to entirely avoid debt. Unfortunately, debt repayment often comes with crushing interest rates that make it difficult to pay down the principal sum.
A key component to managing consumer debt and paying it down involves shopping. Well, shopping around the debt.
Banks will actually compete for debt, and someone with a good to excellent credit score can find banks that will offer deals to switch over his or her debt. Of course, the bank hopes the indebted will fall into a trap and end up continuing to dig deeper into the hole.
But balance transfers are one cheap and fast way to pay down credit card debt. For example, let's say Gretchen has $9,000 worth of debt on her credit card and pays $300 a month at an 18 percent interest rate. She will spend $3,046 in interest and take nearly 3½ years to pay it off.
By using a multiple balance transfers, Gretchen would only pay $507 in interest and fees with the debt paid off in just over two and a half years. That's a savings of $2,539, according to MagnifyMoney's balance transfer calculator.
Find and Plug Those Leaks
Whether it's mindless spending or high interest rates on debt -- everyone has a budget buster. Tracking spending habits and evaluating lifestyle choices are easy ways to quickly find and, more importantly, plug any budget leak.
Erin Lowry writes about personal finance and manages social media for MagnifyMoney.com, a site dedicated to helping consumers save money by finding simple, transparent financial products. She is also the founder of the personal finance blog Broke Millennial.