How Dieting Techniques Can Trim Your Debt
By Eva Norlyk Smith Ph.D.
January 30, 2013
Did the holidays leave you with bloated credit card balances in addition to an expanded waistline? If so, the solution might be a spending diet.
A term made popular in the blogosphere by websites such as AndThenWeSaved.com, DailyWorth.com and MoneyMasterMom.com, a spending diet can be a great way to trim down your debt and expenses. Proponents use words such as going on a “spending fast,” where you drastically cut spending much like dieters may eliminate all carbs and sugar from their daily intake for faster results.
How exactly is a spending diet different from going on a good old-fashioned budget? With a budget, you look at how much money comes in every month and then allocate the money to different categories, starting with essentials such as rent, food and debt payments, and then moving on to the non-essentials, such as entertainment and clothing. It's sensible, effective and, can be mind-numbingly dull.
With a spending diet, you embark on a challenge, cutting back on everything except the basics. Instead of allocating funds to various areas of your life as you would with a budget, you're stripping down to a bare-bones lifestyle. Some even take things to extremes by going on a spending hiatus, and quit spending cold turkey on everything except essentials such as food, fuel, housing and utilities.
Is it effective?
So, do spending diets work?
Absolutely, says blogger Mandy Knight of MoneyMasterMom.com. She and her husband decided to go on a three-month spending diet to see how little they could live on prior to her husband launching his own business. Before the diet, the Knights were spending $800 a week for their family of four. During the three-month spending diet, they cut expenses by more them half, spending $360 to $390 per week.
While the diet lasted only three months, it helped the Knights determine which purchase habits they could do without permanently. The key to success, she says, is making the spending diet just long enough.
“With a short spending diet, you'll miss everything, simply out of habit, Knight says. “After our diet we adjusted our spending to include what we missed most. That way, we ended up cutting our expenses permanently by thirty-one percent. The best part was that our level of happiness didn't change, because we cut non-essential spending that was providing us with little value.”
Helping you readjust your priorities is perhaps where a spending diet offers the greatest value in comparison to a budget.
“Budgets are different, because you generally spend your whole budget regardless of what areas provide you with value,” says Knight. “A spending diet is great, because you'll get a sense of what is really important to you, and what can go. Finding value for your dollars is key.”
How to go on a spending diet
Spending diets differ as much as regular diets do. But they generally include these steps:
1. For a month in advance, write down everything you spend money on. Tracking what you eat is considered by many health experts an effective way to lose weight. Spending is no different. To prepare for your spending diet, keep a diary of your daily spending — it can be a sobering way to find out where the money goes. That $3.75 latte is no big deal when you fork over the money at your local Starbucks. But total it up over a month and there went a not-so-cool $100 that could have been used to pay down your credit card bills.
2. Separate needs from wants. After a month, total your expenses by type and category. For the food category, total what you spent on those lattes, what you spent on eating out and what you spent on groceries. Similarly, make a list of what you spend on essential living expenses, such as rent and utilities. Then group all other expenses by category.
Now, separate needs from wants. Food, transportation and a place to live, obviously, are needs. As for the rest of your expenditures, many are wants — such as clothing and entertainment expenses. For these, take a look at what you can cut back on or cut completely.
3. Weed out the pseudo-needs. There are needs and then there are pseudo-needs. After weeding out the obvious wants, take a look at which needs are really wants. Eating out, for example, is not an essential food item, nor are those yummy lattes. Buying your groceries at upscale grocery stores might be nice, but not essential. Driving to work in your car is convenient, but there might be cheaper ways to go, such as joining a group commute or using public transportation. A gym membership is great, but a DVD or the Fitness Channel offer more affordable ways to work out.
There may be room for pseudo needs in a budget — but not in a diet.
4. Give yourself a very small splurge amount. Just like dieting is less likely to succeed if you cut food to the point of starving yourself, cutting out all extraneous spending can derail a spending diet. Set aside a small monthly amount (say, $100) for unplanned expenses — aka splurging. A small splurge every now and then can offer a safety valve — and, by capping the amount you're allowed to spend, you're limiting the damage.
5. Stick with it. Splurge amount aside, sooner or later you will inevitably get down to the hard stuff. Cutting out the latte or putting a moratorium on clothes shopping for three to six months won't be the end of the world. But, eventually, you'll have to say “no” and it will really hurt. Saying no to wants is never easy, just as it's not easy to stay clear of that chocolate chip cookie when that chocolate craving strikes. But learning to make sacrifices is a great, and necessary, money management skill that will serve you well in the long run.
Of course, you can't keep up a spending diet forever. Your children will grow out of their clothes, and you may need to throw some money at home repairs. But if all you need is to get ahead a bit to tackle leftover holiday credit card bills, a spending diet can be a great way to do so.
“It can be a great way for people to get a jump-start on tackling their debt, because at the end of the month, there's going to be a good deal of money left over,” says Sandy Shore, spokeswoman for Freehold, N.J.-based credit counseling agency Novadebt. “Seeing how much difference you can make, and having that money at the end of the month to pay down debts is very encouraging. It can really help you keep going.”