How To Stop Your Impulse Spending

When I first started getting interested in personal finance, the entire thing overwhelmed me. There were endless blog articles about how to game credit card providers, correctly configure your stock market accounts, and calculate the ideal rate of savings. There was an endless list of different budgeting systems, all requiring what seemed like a ridiculous amount of managerial overhead.

This is way too much, I thought to myself. I just want to stop spending so much on takeout.

All these resources lacked the same thing: the basics. I could calculate what credit card repayment plans would bring me the largest rewards, but nobody taught me the basics about how to handle my paycheck or how to think about expenses.

So, instead of talking about soul-crushing budgeting methods or retirement accounts, I want to teach you the basics. Before you start using a complicated budget or stressing out about retirement, here’s what you should do:

1. Take stock of your current financial situation

The first step to achieving a financial goal of any kind is to figure out your financial situation right now. Without a complete picture of your financial situation, it’s impossible to identify what kind of steps you can make to change it — or even what needs to be changed.

There are a lot of financial tracking solutions out there, and I’ve experimented with many of them, but my favorite is Mint. For someone with a low net worth, no stock market accounts, student loan debt, and lots of odd transactions, Mint is the best solution out there.

• It doesn’t require any day-to-day categorization or manual oversight
• It generates beautiful charts to help you understand your spending
• It shows you your credit score
• It’s free

No, I’m not getting paid to promote Mint. I just like Mint that much. If you’re trying to take control of your finances, your very first step should be setting up Mint.

How to get Mint set up

Mint is free, but getting it set up takes a little time. Expect this process to take up to three hours.

First, open your computer. You want to set up Mint on a desktop environment. Yes, Mint has mobile apps for every platform, but they don’t have all the functionality the website does, and setting up your account on their mobile apps is more trouble than it’s worth.

Once you’ve created an account with Mint, sign in to every bank account you have. I mean every account — all your checking accounts and savings accounts, your Venmo, your credit cards, your student loan accounts, your auto loan provider, your mortgage provider (if you have one), and any other financial account of any kind that you have.

If you have debt that doesn’t come with an account (like money you owe your parents) or you can’t access your account through Mint (as is the case with IRS debt), record the debt manually as an offline account.

Once every single account is signed in, go through your transactions. Mint does it’s best to categorize transactions automatically, but their software does not always get it right. You should go over your transactions from the last month or two manually and make sure Mint categorized them correctly. If they’re not, change how they’re being categorized and save the new category as a rule. After doing this, Mint will categorize things correctly in the future.

Congratulations! You’re all done with setup! Now you should have an up-to-date picture of your financial situation.

2. Stop using your credit cards

Credit cards are a psychological trap. When you swipe a credit card, you feel all the thrill of making a purchase and none of the pain of losing your money. Then when you get a $1,000 bill at the end of the month, you say you’re not going to be so stupid with your money next month — but then you think “I can pay this off,” and the cycle starts all over again.

One of the easiest things you can do to get control of your finances is to stop using your credit cards for day-to-day expenses. Take them out of your wallet and leave them at home. That way, you can still use them for recurring bills or preplanned purchases, but you won’t be able to make impulse purchases.

When you’re trying to get control of your finances, the only reason you should be taking your credit cards out of your house is that you’re dead broke, and you need your credit card to survive. Otherwise, stop spending money you don’t have.

If you’re aware of how great credit cards can be as a financial tool, you may be reluctant to do this. After all, credit cards can be an incredible financial tool. With generous cashback policies and reward programs, using credit cards properly can net you hundreds or thousands of dollars of profit a year.

But the only way credit cards provide this financial advantage is if you pay them off in full, every month -- Otherwise, the interest charges incurred from carrying a balance dwarf the advantages of credit card utilization. 

If you're reading this article, I’m willing to bet you’re not paying them off in full every month, nor are you taking advantage of their particular cash-back programs. Save the financial gaming for when your financial fundamentals are in order.

3. Get a separate bank account for income and expenses

You should have, at minimum, three bank accounts:

1. One for Gross Income
2. One for Savings
3. One for Personal Expenses

Here is what their purposes are:

1. Gross Income: This is the bank account where you deposit paychecks, tips, and other income.
2. Savings: This is the bank account where you will keep your emergency savings.
3. Personal Expenses: This is the bank account connected to a debit card that you will use to pay rent and utilities, buy food, alcohol, clothes from Urban Outfitters, and whatever else you spend your money on in a month.

On a regular schedule (weekly, bi-weekly, or monthly), you should transfer money from your Gross Income account to your Savings and Personal Expenses accounts. There should be no debit card for Gross Income, and the only type of transaction on Gross Income should be transfers to your Savings or Personal Expenses accounts.

You should configure your Personal Expenses bank account so that if you attempt to charge your account when you have insufficient charges, the bank denies the charge. This will keep you from overdrafting your account and spending money you don’t have.

Why should I set up my bank accounts this way?

When you only have one bank account, your money is not assigned to a particular purpose. All your money is in one collective pile, just waiting around to be spent on this or that. It’s easy to think “I need to put money away in savings” and then find you’ve somehow spent it all by the end of the month.

When you need to transfer money from Gross Income to Personal Expenses, however, you’re forced to make a conscious decision about how much you want to spend. If you transfer $1,000 every two weeks, you’re forced to ask yourself “Am I comfortable with spending $1,000 every two weeks?”

This, in itself, can produce major savings. Often, when we are forced to confront our spending, we find that we are not comfortable with the amount we spend.

Another advantage of this system is that it accounts for inconsistent pay. Very few people get paid the exact same amount month to month; if you receive bi-weekly paychecks, you have the occasional triple-paycheck month, if you’re a freelancer, you get paid when people pay you, if you are a service industry worker, your pay fluctuates based on tips, so on and so forth. Your spending, however, should remain consistent over time. Having two separate bank accounts helps you make the most of temporary windfalls, instead of blowing the surprise cash on things you don’t need.

This system also prevents lifestyle creep. As your income goes up, your spending will not go up automatically — you will have to consciously decide to allow your spending to increase.

My favorite part of this system, though, is how obvious it is when you start to make more money. Your balance in your Gross Income and Savings accounts slowly go up, up, up, every time your pay increases. I like spending money, but I like seeing my balance in these accounts go up more.

How do I set up my bank accounts this way?

1. Walk into a local branch for your bank and tell a banker you’d like to open some accounts. They will help you rename your current bank account to Personal Expenses and help you set up Savings and Gross Income accounts.
2. Tell your employer (or anyone else depositing into your Gross Income account) that you would like to switch the account you have on file for your direct deposits. This switch typically only takes a few days and does not interrupt your pay.

Why not just turn your current account into your Gross Income, and make a new Personal Expenses account?

You can do that, I guess. The reason I don’t recommend it is it messes with the way Mint will categorize your expenses a little. Instead of your expenses from your entire financial history coming out of your Personal Expenses, there will be old expenses showing as being withdrawn from your Gross Income account. If you’re okay with that, you can skip a step by making whatever account is configured for your paycheck the Gross Income account.

Now you have a basic system for tracking how you get your money and where your money goes. On this good foundation, you can build a healthy financial life. You can adopt a budgeting system that helps you meet your financial goals, or you can decide how to invest your savings, whether you are saving for an emergency fund, a new car, or retirement. Once you know how much money you’re getting and where that money is going, you can meet any financial goal you want.

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