Wednesday, June 15, 2011

Beware of Incremental Increases

Tip #291 - Beware Incremental Increases. Once you have your budget laid out and you are into a routine of spending that you are comfortable with, it is sometimes easy to take things up a notch without realizing it. For example, you may be great about eating your meals at home, bringing along water bottles in the car, and walking the one mile to school rather than driving and staying within your budget. But once you've been doing that for awhile, you might stop "just this once" to get drinks at McDonald's for the kids. Or you might start to order take out when you've had a bad day even if it's not in the budget. And while all of these things may be okay to do once in awhile, when it starts to become habit, that it becomes dangerous (to your finances anyway). Suddenly these changes become the new normal, and without realizing it, you have started spending more money than you budgeted for.

It is these small, incremental changes that you need to be careful about. It is so easy to get used to these new "luxeries" without realizing that you are spending more money. Sure, it may be just a few dollars once or twice a week, but over time, they add up with little notice. For example, suppose you are a working woman and bring your lunch from home to work each day. But one day you are running late and don't make your lunch so you buy at the office. The cost is $6 - about $4 more than it costs to make your lunch at home. The next week, you hit the snooze button one extra time knowing that you can skip making lunch again and buy in the cafeteria. Before you know it, you are buying lunch about once per week at the office. Seems harmless, no? Well, in a given year that means you spent about $200 extra on lunches that you didn't budget for. That may or may not be harmless, depending on your financial situation and your other miscellaneous costs.

Suppose you also have gotten in the habit of picking up a magazine each week at the checkout counter at the supermarket each week. Again, this is something that wasn't in the budget. At about $5 a pop, it puts another $250 dent in your finances. Add in that you start meeting a friend about once per week for a drink for an additional $250 or so. All taken together, you have been spending an extra $700 for small changes that you hadn't budgeted for at the beginning of the year. These might all become important items for you to have in your life in order to keep things going smoothly and stress-free. But, they also add up to a fairly big expense, and if they become habit without being in the budget, you will not meet the financial goals you set for yourself in the beginning of the year.

So stop and evaluate the small, incremental conveniences that may have crept into your routine that you haven't budgeted for. And see if you can put them back into their place as special purchases rather than regular ones, until you can adjust your budget and include them formally.

In Real Life (IRL) - I started this post several weeks ago, and cannot remember what event made me realize that some small habits had crept into my routine that were starting to put a dent in my wallet. It was either the quick stop at McDonald's for drinks for the kids on a very hot day (and I had forgotten to bring drinks with us) or the soda I was suddenly adding into my shopping lists when I had virtually stopped drinking it for months and months. Or maybe it was the packs of gum that my daughter was asking that I buy for her when I stop at the drugstore (with her money at least). Whatever it was, I knew that none of these purchases were expensive on their own but buying them on a regular basis as they were tempting me to do would surely take money away from targeted saving account. I knew I would have to do better.

While I do think big purchases have a greater impact on my finances than smaller ones, I realize that smaller ones occur much more frequently and without nearly as much research or notice. And I know that there is some truth to the saying "watch your pennies, and the dollars will take care of themselves." And while I don't think we should necessarily deprie ourselves of small treats when we can afford them or for special occasions, I believe it is the little things that we don't realize we are spending money on that can set us back on our financial goals. To that end I am making a concerted effort to be aware of when I am started to spend money on little things on a regular basis That I have not planned for. I hope you will, too.

1 comment:

Harvey Smith said...

Thanks for this great post. You know, it’s totally about me! I always criticize myself and try to improve my life. I try to control my spending, my diet and everything in my life and it works as long as I take control over it. As only I allow myself to buy something that’s not on a shopping list or eat some carbs late in the evening, it quickly becomes a habit. If I exceed my budget, I must find loan lenders online to get additional money to cover some other expenses. That’s why it’s necessary to understand that one small wrong step can be quite dangerous.