Financial 5-a-day: understanding spending

This is the next instalment of my financial 5-a-day project - thinking about how we might use behaviour change to improve our financial nutrition, in much the same way as the fruit and veg 5-a-day campaign led to improvements in physical health.

The suggested 5 categories are talking about money, understanding spending, putting a savings plan in place, getting on top of investing and thinking of your future self.

This blog explores the second of these – understanding spending.

While as a money educator and coach I always encourage students and clients to think through how they might increase income, the one area nearly all of us has immediate control over is spending. I say “nearly” as clearly some citizens face life circumstances which severely limit choices.

However, the vast majority of people can immediately make different spending choices.

The first step is to work out your current household spending position. Where are you at the end of each month? This is likely to involve spending time tracking household spending. Carefully logging all your spending for one month. You can do this yourself on excel or another spreadsheet, you can work with a money coach or financial adviser, and you can use banking apps. There are helpful free online spreadsheets at Moneyhelperand Moneysavingexpert.

While it is simple to list your spending, it is not always easy. It requires a slice of radical honesty, where you list everything, you spend. Include the categories you maybe are not overly proud of – clothing or shoes even though the wardrobe is full, that extra bottle, the online shopping… Don’t judge at this stage. Record spending accurately.

Then when you have the full list, you can categorise into “must haves”, “nice to haves” and “don’t need’s”. You might consider immediately cutting the “don’t need’s. Next think through the “nice to have’s” – do you really need these? Have you got anything similar already? What else might do with this money? Even the “must have’s” may be trimmed – buying less at the supermarket, shifting supermarkets, shopping around for spending such as mobile phone contracts and utility bills. And think through occasions when you might make different decisions around big spending commitments – these are likely to include your mortgage, new car and holidays. What savings might be available?

Behavioural economics also has some useful pointers. Even a few years ago a standard piece of guidance for those struggling with budgeting was to shift to using only cash. This makes it easier to control spending. There is something about tangible money that makes us more reluctant to part with it. However, the use of cash is in severe decline, with 22.1 million adults rarely using cash in 2023. Most often payment is made by card, phone and in some instances, smartwatches.

Even with these change is possible – switch from smartwatch to phone payments, from phone to cards. By putting simple barriers in place like reaching into a bag to your card holder, extracting the debit/credit card and then using it you create opportunities to pause and reflect before spending.

We need to keep in mind the many positives around money. The point here is not to obsess about cutting spending, but rather to spend consciously and with purpose.

In wrapping up this blog I’d like to throw out some challenges – what action might you take today to cut your spending? And what behaviour changes might you put in place this week which will nudge you to make more purposeful spending?

I am curious to know what changes you make. Please feel free to send me a message letting me know.

As you cut spending you create a surplus which can be saved and invested. These are the next two of the financial 5-a-day.