Re: “How do you avoid spending all your leftover money?”

Within the realm of finances, one of the more relatively frequent questions I get asked is how to avoid spending all your leftover money. Everyone knows by this point that they need to save money, but with a nice, padded bank account, it can be very easy to “forget” to save a set amount during a particular month, and it’s even easier to feel “accomplished” seeing a large sum in your savings account and thinking that you already have enough.

I am by no means rich, but I personally have fallen into this scenario before, and the best recommendation I have is to “create expenses.” I’ll explain.

I am very attentive and “obedient” when it comes to addressing expenses. I make sure everything is paid on time, but not so early that I miss out on interest yield. I never forget about any obligations, and I plan ahead to ensure that obligations continue to be met even in potential emergency worst-case-scenario situations. With that being said, I’m essentially exploiting the way my brain works by triggering that sense of responsibility by creating fake expenses.

As a preface to this, the “my savings account is big enough” argument should be completely invalidated if you have less than 6 months’ worth of living expenses saved up. A lot of people say 3 months’ worth is enough, but remember, the emergency itself that is causing you to lose your source of income will likely also directly drain your funds as well (for example, an injury that will rack up medical expenses), and there is no guarantee that you will recover and return to normal in a maximum of 3 months.

Going back to the main topic at hand, let’s create an example and say your monthly income is $5,000. Your expenses in this example are as such (heavily grouped and rounded for ease of calculation):

Rent (or mortgage plus other homeowner expenses) $1500
Utilities (power, gas, water, sewer, trash, phone, Internet, etc.) $300
Medical insurance (health, dental, etc.) $300
Vehicle (loan/lease, auto insurance, fuel, maintenance, etc.) $800
Student loans or other miscellaneous installment loans $200
Food (groceries, restaurants, etc.) $500
Personal care (haircut, gym membership, etc.) $100
Household products and other goods $100
Subscriptions (Amazon Prime, Netflix, Spotify, credit card annual fee, etc.) $50
Travel and other leisurely activities $150
Gifts and charitable donations $100

In this example, you have $4,100 in monthly “expenses,” leaving you with $900 remaining – I put “expenses” in quotation marks because you’ve already taken into account a very large food budget for eating out at restaurants, as well as an additional leisurely spending stipend, as “expenses.” Most people know that all $900 should be going straight into savings, but it’s easy to add an extra $50 here and an extra $100 there and end up shrinking your savings amount.

First of all, make sure you’re not forgetting about any expenses. Are you an independent contractor who runs their own business like I do and doesn’t get income tax withheld? Even if you’re a godlike optimizer of deductions of business expenses, you should be expecting to set aside at least $500 or so per month for income tax, unless you want to go from tax avoidance dangerously close to tax evasion. Are you saving for retirement? Making maximum contributions to an IRA means another ~$500 per month. Combine those two extra items you forgot, and suddenly, you’re short of money, have no savings, and need to cut back on other expenses.

Similar to how you’re budgeting leisure and luxury as expenses into your spreadsheet, also itemize savings as different, individual expenses instead of just lumping everything together as “savings” or “leftover.” Set specific goals for yourself on where each component of your savings is going, and create different savings accounts (where applicable) to keep track of each individual goal (savings accounts are usually either free or have very low daily balance requirements to waive the monthly fee).

Similar to the expenses above, here are some very simple example savings goals (mostly relevant to someone around my age) that you can tack onto your budgeting spreadsheet in the form of “expenses” to turn up the pressure to set aside money for said goals (as well as their corresponding monthly cost):

Maximum $5,500 yearly contribution to a traditional or Roth IRA $458
Maximum $19,000 yearly contribution to a 401k $1583
20% down payment on a $350,000 house purchase in 10 years $583
$15,000 for a wedding in 5 years $250
$15,000 for the first year of newborn baby expenses in 5 years $250
$35,000 Bachelor’s degree fund for a newborn starting school in 18 years $162

Being able to cover all that pushes you into the six-figure yearly salary range, and then you end up getting more expenses piled on just by the fact that you’re richer – you’ll be pushing a 24% tax bracket, you’ll need to purchase more insurance to protect your life and your investments, etc. As you can see, things can very quickly spiral out of control, and it’s all about perspective – you can always put yourself in a situation where it feels like you never have enough money.

So, coming full circle, how do I personally avoid spending all my money? I expand my budgeting spreadsheet to include items similar to the second table, but custom-catered to me specifically. My personal budgeting spreadsheet goes nearly 100 rows deep, and at the end of each month, I “spend 100% of what I earn” … though after reading this post, you know that that’s just an illusion to ensure I’m financially set for my future.