Money leaks, just like water leaks, can be devastating. Have you ever had a leak in your house that caused a lot of damage and cost a lot of money to fix?
I have. Several years ago a small leak on the second floor of our house caused a major portion of the first-floor ceiling to collapse onto our floor. As you can imagine it cost a lot of hard-earned money to repair the damage caused by that leak.
Water Leaks Are Like Money Leaks. Little Money Leaks Cause a Lot of Damage.
I’ve said all of that to tell you this: Having a leak in our house that caused a lot of damage is just like the money leaks you can experience in your personal finances.
It’s so easy to get complacent with your money and let little drops leak out here and there that, over time, can end up causing a lot of damage to your financial situation.
This is how many people easily get into large amounts of credit card debt that eventually begins to overwhelm them and over time will makes their financial house crumble.
So how do you get rid of your money leaks? You actively take control and take steps to prevent them.
If you take control of your money by sitting down and doing a written spending plan every month and stick to it, you’ll find where the money leaks are and learn to plug them up, allowing you to stop living on more than you make.
Of course, there’s a lot more you have to do to repair and restore the damage that your money leaks have caused by drip, drip, dripping over the years, but gaining control and stopping the drip is one of the first steps in the process. When you begin to stop the dripping and begin repairing the damage to your financial house, then you begin to win with your money.
Here’s a passage from the Old Testament that sums up money leaks well:
Now this is what the Lord Almighty says: “Give careful thought to your ways. You have planted much, but harvested little. You eat, but never have enough. You drink, but never have your fill. You put on clothes, but are not warm. You earn wages, only to put them in a purse with holes in it.” – HAGGAI 1:5-6 NIV
Money leaks are absolutely disastrous to your financial state. They almost always cause you to have less money at the end of the month than you expected to have. They’re almost always the cause of a personal budget problem. They’re almost always the reason that people have difficulty saving.
If you find yourself not having enough money at the end of each month make sure you check for “money leaks,” and then do something about your money leaks.
#1: Save All Your Receipts and Review Them
First of all, simply identify where your leaks are happening most frequently. You can do this by adopting a “save every receipt” strategy.
How did you do this? You actually keep a box or envelope in which every receipt for everything you buy is placed. If the receipt was unclear, make an effort to write on the back of the receipt exactly what the receipt represented.
Whenever you are at a store, take the receipt and stick it in your pocket or purse, then that evening when you empty out your pockets or go through your purse, just toss all the receipts in the box or envelope.
At the end of each month, go through them and figure out which receipts were essential and which ones weren’t. If you look very carefully at the non-essential receipts, they will often reveal the worst of your spending mistakes.
This will achieve a number of things at once:
First, you will see patterns in those collected receipts. You will realize that you were most susceptible to “money leak” purchases when going to certain stores to … restaurants, bookstores, department stores, etc. Knowing those patterns helps you keep you guard up, something I’ll touch on again later.
Secondly, you will be forced to stare the reality of wasteful spending right in the face. When you have a pile of several hundred dollars in “money leak” receipts sitting right in front of you, it’s pretty clear that you need to get a strong grip on wasteful spending.
#2: Start Using a Budget
My feeling on “money leaks” and non-essential spending is that a little bit is good, but too much quickly becomes very bad. It’s good to feel as though you have the freedom to spend a little money whenever you feel like it – and to actually do it sometimes – but if you do it too much, you destroy your long-term goals.
The obvious way to handle this is to put a cap on our “free spending” money. In other words, unless an expense is an absolute necessity, the money for it has to come out of your “free spending” money. Once that money is gone, there is no more until next month.
Naturally, this will lead into budgeting because, honestly, that’s what you’re doing here. You’re setting aside a portion of your monthly income toward a certain expense. So, it’s a natural follow-up step to dive into budgeting 100 percent.
Why budget at all? Or, better yet, why budget beyond simply allotting money for free spending? Even if you don’t stick with it over the long term, actually building a budget correctly (as described in that linked article) forces you to really see where all of your money is actually going. That process can end up convincing you to ask a lot of powerful questions about your financial choices. Do you really need a new car? Do you really need a house or a bigger apartment? Do you really need this much entertainment spending? Those are great questions to ask and a proper budget forces you to think about them.
And I’m sure you will find that electronic budgeting makes it much easier. I’ve tried using a paper budget and it ends up being edited and written on so much that it’s practically useless. On the other hand, if you design your budget in a spreadsheet program, you can easily make changes while you’re figuring things out. If you want to use a paper budget, just print out your spreadsheet once you’re done. Ultimately you may even want to use some other form of online electronic budget help.
#3: Avoid Your ‘Leaky’ Places
As I mentioned above, one of the big advantages of digging through all of your receipts is that it will help identify the places where you are most susceptible to money leaks.
Naturally, a great step to take is to simply avoid those places. I have found that most of the places where money leaks occurr are places I really had no reason to visit otherwise. There wasn’t anything I needed at that convenience store near our apartment. There wasn’t anything I needed at the bookstore or at some of the shops on Main Street where I love.
So, the best thing to do is to simply make the conscious choice to stop going to those places.
#4: Budget for Expenses Before You Go (and Don’t Carry Plastic)
Sometimes, you may find yourself going to events and places where you know you’re going to spend money. However, during those events, you’re tempted to spend money on little things that you probably won’t remember down the road. They’re simply perfect storms when it comes to money leaks.
When you’re in that type of situation, use a simple tactic for keeping control of your finances. Simply calculate how much you’re going to spend when you’re at those events in advance, withdraw that amount in cash before you go, and leave the plastic at home. If something interesting comes up and you want to spend money on it – like a snack or a neat item at an unusual store – you can tap that cash freely. However, when that cash is gone, it’s gone.
Don’t take credit cards in these situations, either. Leave the plastic at home or at the hotel or somewhere else where the cards are secure. That way, you don’t end up just swiping the card to pay for little temptations.
But what if you see that must-have thing? If you really want it, you can always go back to the house or to the hotel, retrieve your card, then go back and buy it. If it’s really that good and that essential of a deal, you’ll want to do this. If it’s not really that big of a deal? You’ll pass on it.
Having this kind of limit on you spending forces you to make smarter choices about what things you spend your money on in the moment.
To Sum Things Up
Money leaks – small expenses that you forget about quickly after spending the money – are poison to any kind of financial progress. If you have too many of them, it can make personal finance feel incredibly confusing and hopeless because it feels like all of your money is just evaporating before your eyes.
Don’t let that happen. Take charge. Start saving and studying your receipts. Build a budget. Avoid the places that cause your money to leak. Plan ahead for known money leaks. Make some simple and smart food spending rules.
Before you know it, your money leaks will start getting plugged up and your earnings will start staying in your checking account where it belongs.