Are you really financially literate? Spending Edition

By Jackie Lam
August 18, 2020
Chime is a financial technology company. Banking services provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC

Get paid. Spend that dough. 

When it comes to spending, is there really much more to it than that?

Let’s briefly hit “pause” here. This line of thinking can lead to common spending pitfalls, including  “online binge shopping amnesia” or “it’s the last day of the month: where did my money go?”

In this installment of our “Are You Really Financially Literate?” series, we’ll give you the low-down on the major financial terms and concepts around spending. Read on to learn more. 

Put your spending on a timeline

When you spend, you don’t just throw down money on what you need now  —  rent, putting food on the table, and grabbing a quick bite at the drive-through. You also spend on the past and future.

For instance, besides your day-to-day expenses, you might be paying for your past in the form of debt. You might also be spending on the future. This could come from taking an online class, buying supplies to start a side hustle, or saving for your kid to go to college. 

Divvy up your spending

Instead of grouping all your spending into the category of  “money that leaves my bank account,” break it down into groups. Get nitty-gritty. How much do you spend on bills, rent, utilities, and credit card debt? How much do you spend on household purchases, like toilet paper and laundry detergent? 

If you’re new to tracking your spending, it’s helpful to find different ways to go about it. For example, are you able to “pay yourself first?” This means you first tuck away some money into savings before paying for other things.

Fixed versus variable expenses

Another way you can categorize your spending is by dividing your costs into fixed expenses and variable expenses. 

Fixed expenses are costs that don’t change from month to month. Think: rent, subscriptions, monthly debt payments, and insurance premiums. Variable expenses are expenses where the amounts change from month to month. For instance, food (both groceries and eating out) and buying clothes. 

One more thing: Fixed expenses are not always essential. Nor does variable equate to disposable. For instance, while food spending falls under “variable spending,” you definitely need to eat. And your Netflix or Hulu subscriptions may be the same every month, yet you can probably drop these streaming services if you need to save money.

Compare your spending against savings

You’ll want to compare how much you’re spending against how much you’re saving. Take it from my friend Dave Fried, one of the most frugal people I know. Fried says  you should think of your personal spending like a business. Bottom line: What goes out (spending) should be greater than what comes in (income).

Fried applied this thinking back when he earned minimum wage at a screenprinting shop in Chicago. He was still able to save some beans. And now that he’s a self-employed filmmaker and Yiddish language instructor, he earns more money. Yet, he has the same money mindset. Because of this, he’s able to save even more money.

Understand the relationship between saving and spending

Can’t save a dime at the end of the month? You might believe that this is because you don’t earn enough. Yet, while raking in more dough is a great idea, if you want to save money, you’ll need to take a closer look at your spending. And, when you make changes to your spending, this is when you can really start to save.

Don’t believe me? Think about those stories of folks who bring in six-figures-plus, and are buried in debt. Yet, other people, like Fried, managed to save money while earning minimum wage. 

To get started, there are a bunch of ways you can cut back on your spending. While saving on housing, transportation, or food can save you the most, there are other ways, too. For instance, you can try switching to another Internet provider to save money on your wireless bill. Or, you can download books from the library instead of buying them.

Spend less, stress less

When you spend less, you’re less likely to fall into debt, And what’s more, when you have more money in savings, you’ll probably experience less anxiety and stress about your finances.

Spending usually goes into a checking account 

Money you use for your day-to-day spending usually goes into a checking account. This way, you won’t have any trouble accessing your funds. 

Want to know another good reason why a checking account is a better place to park your spending money? According to a federal regulation, most savings accounts only allow for a certain number of transfers a month. 

Plus, your debit card is usually linked to your checking account. So, you’ll want to be sure you have a checking account for your spending. 

Play forensics

Getting a grip on your finances can be confusing and a bit overwhelming. Exactly where does your money go?

So, you should put on your detective hat and do some poking around. A good place to start is to look at your transaction history on a money management app. Another place to check? Log onto your mobile bank account app and look at your transactions there. You can also download your monthly statements.

Spending trumps income

The way you spend money matters. That’s because your spending habits will determine whether you have money to save. 

Remember: If you make positive spending changes, you can pay for your essentials, save more and make headway toward your goals. Now, that’s a win-win-win! 

This page is for informational purposes only. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.

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Jackie Lam is an L.A.-based financial writer whose clients include Fortune 500 companies and FinTech startups. Her work has appeared in Forbes, Business Insider, and GOOD.

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