One of the most challenging parts of getting a grip on your finances is finding your money “leaks” and plugging them up. It was easily the most difficult part of our financial turnaround and it took a long time before we really got this under control.
Let’s start with the basics.
What’s a Money ‘Leak’?
A money leak is simply any amount of money that you spend and are unable to identify what you spent that money on at the end of the month when you’re reviewing your bank and/or credit card statements. So, let’s say you take out $20 from the ATM and use it at a restaurant on the 6th of the month, but when you look at your finances at month’s end, you look at that ATM withdrawal on your bank statement and just scratch your head. Another example might be that you spent money on something online and it shows up on your credit card statement with a very vague description so that when you look at it, you’re very unsure as to what the charge is for.
With a little bit of research, you can usually figure out where the money actually went, of course. The problem is that you don’t actively remember spending that money. It just leaked out of your account and was spent on something that was so trivial that you don’t remember it at all just a few weeks later.
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.
My Own Experience with Money Leaks
Before our financial turnaround, Sarah and I had tons of money leaks, but part of the reason for that is that we didn’t really track our finances much at all beyond watching the balance of our checking account rise and fall. We would sometimes look through the transaction list, but there were usually just a lot of shrugged shoulders as we looked through a long list of transactions from Amazon, the local bookstore, the convenience store near our apartment, and so on.
As we started our financial turnaround, we put some very stiff restrictions on our personal spending for a while. We would often go weeks without spending any money other than on basic food.
After a while, we started loosening the reins on our spending and we found that as soon as we did that, money leaks started occurring. We’d find transactions that we didn’t remember or ATM withdrawals where the cash just disappeared into thin air.
It was at that point that Sarah and I realized we needed to do something about our money leaks.
Strategy #1: Save All Receipts and Review Them
Our first approach was to simply identify where our leaks were happening most frequently. We did this by adopting a “save every receipt” strategy.
How did we do this? I actually kept an old shoebox in which every receipt for everything we bought was deposited. If the receipt was unclear, I made an effort to write on the back of the receipt what exactly the receipt represented.
Whenever I was at the store, I would always take the receipt and stick it in my pocket, then that evening when I cleaned out my pockets, I’d just toss all my receipts in the box.
At the end of each month, we’d go through the box (usually, I did this, to tell the truth) and figure out which receipts were essential and which ones weren’t. Looking carefully at the non-essential receipts often unveiled the worst of our spending mistakes.
This accomplished a number of things at once.
First, I did not want to put receipts for poor spending decisions in that shoebox. I came to hate digging through that shoebox at the end of the month and finding receipts for idiotic things like $2 Gatorade bottles from the gas station or $13 for some book that I haven’t read yet and could have easily checked out from the library. That negative feeling carried into the next month, making me want to avoid the worst of my money leaks.
Second, I would see patterns in those collected receipts. I’d realize that I was often susceptible to “money leak” purchases when I would go to Jordan Creek Town Center in West Des Moines. I was also often susceptible to “money leak” purchases on Main Street in a few different towns. Bookstores were also places where money would often leak out of my pocket, as were convenience stores. Knowing those patterns helped me keep my guard up, something I’ll touch on again later.
Finally, I was forced to stare the reality of my wasteful spending right in the face. When I had a pile of several hundred dollars in “money leak” receipts sitting right in front of me, it was pretty clear that I needed to get a strong grip on my wasteful spending.
Strategy #2: Use a Budget – and a Smart Budgeting Program
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 was to put a cap on our “free spending” money. In other words, unless an expense was an absolute necessity, the money for it had to come out of our “free spending” money. Once that money was gone, there was no more until next month.
Naturally, this led straight into budgeting because, honestly, that’s what we were doing here. We’re allotting a portion of our monthly income toward a certain expense. Thus, it’s a natural follow-up step to dive fully into budgeting.
I’ve already written a detailed guide to your first budget. That article describes in detail the steps we took in setting up our first budget and, honestly, our current budget is just a gradual evolution from that starting point as we tweaked things to work for us.
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.
It didn’t take long for us to learn that electronic budgeting makes it so much easier. I tried using a paper budget at first and it ended up being edited and chicken-scratched so much that it was practically useless. On the other hand, if you design your budget in a spreadsheet program (as we did for a long time), 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.
Eventually, we moved to using You Need a Budget as our budgeting system. It did a great job of helping us build a budget that really worked well and, thanks to Dropbox, made it easy for us to add expenses while we were out and about on our smartphones without sharing this data.
Today, our budget keeps us on track toward our overall goal of financial independence, but it was during that period of plugging our money leaks that our budget really made a transformative difference.
Strategy #3: Avoid ‘Leaky’ Places
As I mentioned above, one of the big advantages of digging through all of our receipts is that we were able to identify the places where we were most susceptible to money leaks. I learned that places like the Jordan Creek Town Center area, the Main Street shops in a few towns near where we lived, the bookstore, and the convenience store next to our home were places where I was very susceptible to spending money on unnecessary things without really thinking about it.
Naturally, a great step to take is to simply avoid those places.
We found that most of the places that we went where money leaks occurred were places that we really had no reason to visit otherwise. There wasn’t anything we needed at that convenience store near our apartment. There wasn’t anything we needed at the bookstore or at Jordan Creek or at the Main Street shops.
So we simply made the conscious choice to stop going to those places.
I’ll admit that the hardest place for us to cut out was the convenience store near our apartment. It was often very tempting in the evening to just run over there and buy some beverages or a quick snack (they actually had an amazing kitchen there that would prepare pizzas and sandwiches for you).
Most of the other places were easy to avoid if we made the conscious choice to do so. If I wanted books, I didn’t go to the bookstore (or to Amazon). Instead, I moved to using the library. We also found ourselves avoiding excursions that were primarily intended for spending money – we stopped going to Main Street shops and the Jordan Creek Town Center because those were just places where we would spend, often without thinking, and get nothing essential in return.
Instead, we found other things to do with our time. Since we weren’t spending Saturday afternoons shopping any more, we looked for new things to do. We got involved in programs with our local parks and recreation department. We got into geocaching. We started hosting dinner parties and playing board games (and, often, those dinner parties were reciprocated). We had more movie nights.
Basically, we ended up replacing expensive activities with cheap ones. We just tried out a bunch of different ways to use our time that we were previously using in our most tempting places and we ended up finding a lot of cheap and free activities that we really enjoyed.
Strategy #4: Budget for Expenses Before You Go (and Don’t Carry Plastic)
Sometimes, we find ourselves going to events and places where we know that we’re going to spend money. I go to Gencon every year with friends, for example. Sometimes when friends or family visit us, they’ll request to go shopping in Des Moines. We have a few weekends a year that we spend with old friends, usually in a town that’s halfway between us. Sarah visits her sisters fairly regularly and they’re always up to shenanigans.
Those are special events that we deeply enjoy and we’re not going to give them up. They’re socially and emotionally important to us.
However, during those events, we’re very tempted to spend money on little things that we probably won’t remember down the road. They’re simply perfect storms when it comes to money leaks.
When we’re in those kinds of situations, we use a simple tactic for keeping control of our finances. We simply calculate how much we’re going to spend when we’re at these events in advance, withdraw that amount in cash before we go, and leave the plastic at home. If something interesting comes up and we want to spend money on it – like a snack or a neat item at an unusual store – we can tap that cash freely. However, when that cash is gone, it’s gone.
We don’t take credit cards in these situations, either. We leave the plastic at home or at the hotel or somewhere else where the cards are secure. That way, we don’t end up just swiping the card to pay for little temptations.
But what if we see that must-have thing? If we really want it, we can always go back to the house or to the hotel, retrieve our 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, as you should.
I find that having this kind of limit on my spending forces me to make smarter choices about what things I spend my money on in the moment. Let’s say, for example, that I saved up enough to buy two or three board games at the annual gaming convention that I attend. I have that cash in my pocket, but knowing that I’m restricted to just that limit requires me to be more choosy about what I buy. If I had my plastic there, I’d be more likely to spend without thinking about it.
Strategy #5: Delete Your Credit Card Numbers
All of these previous strategies are useful, but they don’t really help with the temptation of online shopping. When it’s incredibly easy to just sit at your computer and click a single button or two in order to have the item you want shipped to your house, it is really easy to sometimes have money leaks.
Trust me – I know all about this kind of money leak. The biggest single problem I’ve had with money leaks since our financial turnaround has come from buying Kindle books and forgetting about them. It was so easy to just buy them with a single click from my Kindle device… and then I’d forget about buying them.
The best solution for these kinds of computer-aided money leaks is to simply delete your payment information from every online site that you frequent. This doesn’t mean that you can’t shop there, of course, but it does mean that each time you actually consider making a purchase there, you have to dig out your credit card and manually type in all of that information.
I’ve found that this simple step is often enough to make me realize that I’m about to spend money without really thinking about it and forces me to pause for a little bit. That little pause is usually enough to stop me from spending money needlessly.
Personally, I take this a step farther and do not allow my browser to store my passwords for websites. That way, I have to take yet another step to make an online purchase. I have to actually type in my password instead of already being logged in, and since I use a password vault system, it actually takes some time to do it.
The purpose of all of this is to make small online purchases less convenient and thus substantially less tempting. If a simple step can keep me from buying a cheap Kindle book or buying a song from Amazon or Apple on a whim, it’s going to end up plugging a lot of money leaks for me.
Strategy #6: Adopt Some Smart Food Rules
For the last three years or so, I’ve had a very simple food rule. With one exception (thanks to a small town situation), I do not buy any food or drink from convenience stores. Period.
There are a few reasons for that simple rule. First, the bottled drinks and snack foods at convenience stores are usually incredibly overpriced. If you compare the price per ounce of a typical bottled drink from a convenience store with the price if you buy it at a discount grocer, the difference will shock you. The same thing is true when it comes to individually packaged snack foods.
Another problem is that if I buy something, I usually have children clamoring for something as well. That means that a $2 purchase suddenly becomes a $7 or $8 purchase and, even worse, it’s a purchase that establishes bad dietary habits for the kids.
A third factor is that the stuff there isn’t really very healthy. Do I really need a caffeinated sweet beverage or a high calorie and high carbohydrate snack? Probably not.
For me, the problem is that convenience store purchases like this are incredibly forgettable – and that’s detrimental to both my health and my wallet.
If I know I’m going to be on a road trip, I take a few minutes to plan in advance. I’ll take a healthier snack for the road and take along a water bottle as well. That way, if I do have to stop at a convenience store for gas, I have no reason to go inside and I’ll just pay at the pump.
I have a few similar rules that help push me away from forgettable purchases which, as I mentioned, are detrimental to both my health and my wallet. I don’t buy fast food when I’m alone. I pack sandwiches and drinks for everyone before any road trips. Lately, I’ve adopted a “no sodas” rule that’s been going well, too.
All of those rules serve to prevent me from stepping into situations where I’m not just making a purchase that’s really prone to money leaks, but also benefit my personal health. Not only do these rules keep me from asking where all of the money went, but they also keep me from asking where all of the pounds came from.
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. Delete your online account information. 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.