Managing Where Your Money Goes: Simple Ways to Spend Smarter and Save More

Income proves to be an insufficient determinant of who saves and who does not. As the joint analysis of the Bureau of Labor Statistics and the Bureau of Economic Analysis revealed, 50% of all Americans were persistent losers regarding net savings in 2022 regardless of entering the new year with a profit from their salary. Since those citizens with lower income levels recorded negative savings, it means that they have spent more than they earned, relying on credit cards and liquidating assets to meet their financial obligations.

At the same time, the report sheds light on surprising figures related to the income category. Thus, there are nearly 40% of six-figure-salary Americans who do not save anything, given that almost 38% of the most prosperous households saved money on average in 2022, compared to only 4% of all Americans. Therefore, the researchers concluded that the ability to save appears to be different since the capacity to set money aside saves distinctly regardless of whether the person has a substantial income or not. In other words, the statistics determine that people save according to certain criteria, which might seem unrelated to the size of their income.

The majority of us fit into a handful of categories in terms of spending. First, there are people who systematically spend more than they earn, gradually accumulating debt. Second, there are those who spend roughly the same amount as they make, leaving nothing in savings. Finally, there are savers who spend less than they make and reinvest the difference. In theory, the higher one’s income, the more likely it is to fall into the third category. However, in practice, many high Earners fail to save because of their inconsistent spending.

For many, being able to save money means adjusting one’s spending to make sure that it stays below the income, with the difference allocated to savings. Otherwise, one relies on unpredictable windfalls or gifts that one is not entitled to expect any time soon.

Subscribing to unnecessary expenses, whether physical or digital, is not a characteristic of high Earners; rather, it is a universal weakness among individuals from all income categories. Overspending is a matter of environment, where marketing and peer pressure promote consumption as something inherently fulfilling, making it challenging to refrain from buying when presented with a sale or a discount. The root cause of discretionary spending lies in convenience as a characteristic of modern shopping. The act of purchasing requires minimal physical effort nowadays, whether through cards, mobile apps, or other instruments that eliminate the need to handle cash.

In theory, credit cards allow one to spend more than one earns and only pay the difference later with interest, making them convenient instruments for short-term purchases with a guaranteed return on investment in the long term. In practice, credit cards are notoriously confusing, primarily due to the minimum monthly payment, which is only slightly higher than the amount spent in the given month, making it easy to accrue interest with no significant progress toward paying off the balance.

A 5,000 dollars loan at 22% is a typical example of a credit card gimmick. According to the amortization schedule, the minimum payment during the period would be around 1%, plus the size of the monthly interest. It would take nearly two decades to pay off the loan, with the amount of interest surpassing the principal by more than 8,000 dollars. In essence, the card allows the cardholder to borrow and spend the amount they could not afford, using their assets and future income as collateral. The fundamental trick is that the minimum is only enough to keep the borrower comfortable for as long as possible while keeping the lender profitable in the long run.

Credit card companies aggravate the situation by pre-selling additional services to pay off the debt, which is a practice that has been heavily regulated in the last five years. Five of the largest credit card companies, including Bank of America, Discover, and American Express, faced regulatory consequences and returned over 1.5 billion dollars to customers who were misled into purchasing add-ons, including payment protection or identity theft insurance. Essentially, such add-ons are additional loans, either on favorable or unfavorable terms, depending on the customer’s initial level of debt. The critical insight is that any payment protection plan makes one’s credit card more expensive depending on one’s outstanding balance, with the annual percentage rate (APR) increasing substantially in most cases. If buying a new item or service comes with a choice of adding such a program to one’s credit card, the better choice is to refrain from buying altogether or only purchase the product, not the subscription.

No type of purchase demonstrates the consequences of an installment plan better than a car, as dealerships only discuss the price per month or advise to spread the expenses over several years. The reason behind it is that the longer the loan spans, the more interest one pays to the dealer in the long run.

The statistics are eye-opening, with a national average of around 70 months, or six years, of repayment and an average monthly payment of 770 dollars. Extending the auto loan from 36 to 84 months increases the interest expenses by roughly 200%, even with an identical APR. The same tactics apply to trade-in deals; with roughly a third of all used cars having negative equity, and the average amount owed in 2022 reaching 7,000 dollars. Unlike homes or stocks, cars are depreciating assets, which means that their value is lower than the outstanding loan amount, even after driving them off the lot.

None of it implies that buying a car is unwise; instead, it is crucial to consider the opportunity cost, or the price of choosing one option over another, when selecting the terms of the loan. In other words, before buying the car, it is imperative to assess the total cost, including insurance, maintenance, fuel, and the interest paid to the lender, if any.

It is rarely rational to spend money without considering the context, whether it concerns an impulse buy, upgrading one’s living conditions, or taking a vacation. In many ways, it is the comparison to others that drives excessive and unnecessary spending, as people tend to justify every expense on the principle of everyone else doing the same. New products and services are presented to consumers as essential, regardless of their actual status, while no one is openly encouraged to skip a purchase in favor of future retirement. Moreover, people often use money to alleviate their unpleasant emotions, such as stress or boredom, as an easy alternative to addressing their problems. For some, the combination of a poor mood and a purchase of something unnecessary proves to be addictive, with the quick euphoria turning into regret and loss of savings in the following days or weeks.

Spending should be intentional rather than automatic, which can only happen when one is aware of the alternatives. In essence, spending tracking is an exercise in detective work, where the primary goal is not to judge one’s behavior, but rather to document it based on the available evidence, including income, expenses, and any relevant information on the items purchased. One year of records, ideally, will provide a complete and unbiased view of one’s spending since bills tend to fluctuate, making a one-month analysis misleading or at least incomplete. Spending in cash is the most challenging category to track since there is no electronic record of it; therefore, one has to estimate it based on averages or withdrawals. Finally, it is crucial to note that categorizing things in broad strokes defeats the purpose of tracking, which is to become more aware of one’s choices. Therefore, spending should be divided into as many categories as possible, be it food or entertainment, with no emphasis on any of them as one is simply being authentic with one’s finances.

Spending tracking can be done manually, as it is relatively straightforward, or with apps or spreadsheets, some of which provide helpful insights. It is critical to use the option that is easiest to use on an ongoing basis, ideally, without interruptions. Most tools serve a particular purpose, which should be identified before investing time in learning their intricacies. Many free services are powered by advertisements, user data monetization, or both, which means that their recommendations are not necessarily evidence-based or fully transparent. Some apps offer simplistic calculations of net worth, based on income, expenses, and savings, without separating expenditures into categories, which means there is little to learn from one’s interactions, except how to update one’s net worth every month. A regular notebook or a spreadsheet will suffice in most cases, as long as it is used consistently.

None of the suggestions above mean that one should never spend, but rather that every dollar spent should contribute to a particular goal. The changes may not seem profound, but limiting credit card purchases to things one intends to buy, using installment plans only on essential large purchases, and canceling subscriptions that do not serve any purpose provide ample room for savings. The adjustments are sustainable on a daily basis; therefore, it is enough to make one small change and keep it for the next year, or two, or three, and watch it transform one’s finances for the better.

This article is for general educational purposes and isn't personalized financial advice. For decisions specific to your situation, consider talking with a licensed financial advisor or credit counselor.