Stop the Money Leak or Divert the Flow?

With the oil spill in the Gulf getting out of control, I thought I’d share a quick list of some of the most common budget leaks, along with a strategy for stopping the leaks and diverting your money elsewhere.

Pretend that last month you sat down and prepared a budget. You set up spending categories and assigned a dollar figure to each one. Now we are at the end of that one month period and you’re reviewing your spending against your budget. How did you do? What are the areas that you found to be the most challenging? Where are the leaks in your budget? Even if you don’t do a budget, where would you guess the leaks would be?

Common Money Leaks

Areas that I see getting out of control for me from month to month include:

Dining Out – This has been the hardest area for me to control. When I do try and budget this, I almost always undershoot it. And with as many restaurants as there are around us it’s super easy to just head our for dinner. Throw in drinks beforehand and the bill can get pretty high quickly.
Convenience Items – I’m not a coffee drinker. I like coke (soda) instead. When I’m headed out to work for the day, I’ll make a stop at the convenience store for a fountain drink. That’s a $1.50 charge that I could simply use to buy cokes for the house. Coffee drinkers have the same conundrum: coffee at home or the $1-$5 on coffee at Starbucks or 7-11. By the end of the month, you’re looking at $25 to $75 dollars in extra spending.

Other leaks…

  • Entertainment – This isn’t as tough for me. I’m pretty content with my internet connection and the occasional Redbox rental. But I know it’s a big leak for many.
  • Holidays and Gifts – It’s not usually an issue every month, but for the big holiday season, this can put a big dent in your budget. Possibly even leave you with some debt to cover the shortfall.
  • Fuel – I don’t drive as efficiently or as smart as I should. I take too many short trips, and I’m always racing to get there on time so I spend more in fuel than I should.
  • Energy Costs – I’m in a constant battle with my A/C. Comfort vs. savings. But I also use too much energy by leaving too many lights on, or I let the water run too long.

Stop the Leaks

So how do you stop these leaks? Well, you can start by planning your budget a little better. Add in some padding for the hard to control areas. Leave room for the unexpected or miscellaneous expenses. Then you can implement tricks to help you spend less. The carry only cash method works for some. You can find ways to do the things above for less (i.e. Restaurant.com coupons for dining out). In general, you can hyper-focus your efforts on controlling the poor spending in these leaky areas.

Divert Your Money

Instead of trying to shut off the flow of money in your spending, why not do what BP is trying to do with the oil in the Gulf. Divert it. Take pressure off of the spending control and send money to your savings account first (i.e. pay yourself first). Then there won’t be as much money in the spending reserve (your checking account), and you can worry less about leaks robbing you of all your money.

Use Both Strategies

The most effective strategy, I believe, is to spend your energy in both places. Divert a good percentage of your money to safe places like your separate savings account and tax-advantaged retirement accounts. Then, let the rest flow out of your spending with an honest attempt at controlling things using budgeting tools and frugal practices.

What do you think? Is it more important to control the spending or divert the flow of your money into save havens?

Last Edited: May 25, 2010 @ 10:58 amThe content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. I like the analogy. I do have to ask, what makes you reference tax-advantaged retirement accounts as “safe places”?

  2. It’s safe in that you can’t spend it as easily. The penalties and taxes you’d have to pay to use that money are a deterrent to using the funds. Remember, this post is all about saving your money from your own poor spending. Tax advantaged accounts are a shield.

    What’s not safe about them?

  3. PT:

    You’re exactly right and I agree with you. I wasn’t quite sure what you meant in your post so I thought I’d ask. From an accumulation or investment perspective then a retirement account might not be a “safe” place to put your money depending on the underlying investments. It depends on what you define as safe. I agree with your point.

  4. yeah, “it’s what’s inside that counts”, right?

    for what it’s worth, i have faith in the U.S. business in the long term, and I think anyone in the stock market for the long-term will be just fine.

  5. Jason @ One Money Design says:

    Quite creative, PT. I recently realized my money leak is with convenience items too. Man, it’s so easy to buy a $2 cup of Starbucks when I could just as easy get it at work for free. Silly spending. I agree 100% on the diversion strategy. You have to get the money out of your spending account and elsewhere (preferably at when paid). Added this to my roundup for tomorrow. 🙂

  6. Thanks, Jason.

  7. Aury (Thunderdrake) says:

    I think one thing that separates me from a lot of people is not the fact that I’m always avoiding buying these small little doodads on a regular basis. What makes me really stand out is that when I do, and very rarely I do, I become extremely aware of it.

    One of my biggest drives isn’t so much to ‘save’ but to invest. Instead of thinking of all the nice things money can buy, I’m bent on getting my paws on assets. Things that generate income for me.

  8. I think that by consistently putting a predetermined amount into savings or another safe haven, you’re already controlling your spending in a sense.

    You’re creating limits on your discretionary income, by “spending” it on your future savings. I think this is way more important than controlling spending on smaller items such as eating out and entertainment.

    But if you want to get your savings into a higher gear, then you can always start finding ways to cut back on spending to create more money to save.

  9. Ace @ aceofwealth.com says:

    PT great post. I think that you brought up a number of really great ideas and thoughts. I love the analogy as well =P.

    One thing that I think should be pointed out is that without a budget it makes it really difficult to determine where the leaks are. Of course you can always try to guess where they are, but without tracking your spending there’s no way to really know how much you’re actually leaking.