Reviewing your spending habits

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Do you think you spend too much money? Overspending can lead to excessive debt and make it difficult for you to reach your financial goals, such as a college education for your child and a comfortable retirement at a reasonable age for yourself and your spouse or partner.

Your overspending might actually be a case of careless spending—purchasing goods and services with little regard for the impact it will have on your financial big picture. If you feel your spending has gotten out of hand, try conducting an assessment of what your recent purchases have been. Even if you feel confident you have things under control, becoming more aware of your spending can only improve your financial well-being.

Here are some common-sense tips that can lead you to a higher level of spending awareness.

Understand needs versus wants
One of the first steps toward spending more carefully is to recognize when spending is discretionary rather than necessary. Discretionary spending is spending on things that are nice to have but you could do without. For example, consider how many times a week you may eat out, or if you have made recent shopping trips for items that might not be necessary to your wardrobe or home. Next time you may want to reconsider some of these activities, in order to reach your financial goals.

Recognize that little things mean a lot
Forgoing even relatively small expenditures can make a big difference over time. For example, by bringing a reusable bottle of tap water to the workplace instead of spending $1.50 a day on bottled water from a vending machine, you will save $7.50 a week, or about $30 a month. Invest that $30 a month at 4% annual interest calculated monthly, and after 10 years, you will end up with a pretax balance of about $3,744. After 20 years, your bounty will grow to about $7,488.

Know how to cut painlessly
Target ongoing spending in areas where you might not even notice any real impact from cutting back. For example, raising your auto or home insurance deductible from $250 to $500 or even $1,000 can lower your premiums significantly, and you will generally come out ahead if you don't have a claim for at least a few years. Instead of buying movies, books or CDs, try renting them from the library for free. Turning down your thermostat by as little as one degree Fahrenheit can reduce your heating costs by about 3%.

Track your spending against your current budget
Conducting an ongoing review of your budget is a critical part of tracking your spending habits. You can choose among a number of budgeting tools, including a paper ledger, an electronic spreadsheet, personal finance software or one of several free services on the Internet to aid in this process.

If you have been operating on a strict budget for some time and find you are still overspending, looking at your budget on a consistent basis will help you see where your money is really going. For example, during the summer you may find you are spending more than you budgeted for on electric bills due to air conditioning needs. With this in mind, you can determine where you might cut back to keep your spending on track.

It is important to review your existing expenses against your income and adjust accordingly, so you can maintain the same level of savings throughout the year. Consider performing this exercise every few weeks to see where you are doing well and which areas may need to be adjusted.

This is a hypothetical illustration. These returns are for illustrative purposes only and do not reflect actual (product) performance.

The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017