Managing money can feel like an uphill battle — but according to Ramit Sethi, it may be because you’re approaching it the wrong way.
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In a recent TikTok, Sethi outlined the four categories of spending everyone should track: fixed costs (rent or mortgage, utilities, debt), investments (401(k), Roth IRA), savings goals (vacations, a house down payment, an emergency fund) and guilt-free spending (dining out, drinks, clothes and shoes).
“If you don’t know these basic numbers, it’s no surprise that you’re not getting ahead with your money,” he said.
Sethi said many people struggle with these numbers for emotional reasons, not mathematical ones. In a blog post, he shared the responses he received when he asked his followers on X why they don’t have a budget or a conscious spending plan. The most common themes: fear, laziness, confusion and anger. All of these feelings are legitimate — and you can get past them, he said.
With that in mind, here are Sethi’s five steps to build a conscious spending plan.
Know Where Your Money Is Going
If you’re spending more money than you’re bringing in each month, you probably don’t know what your lifestyle costs, Sethi said. To fix this, group your spending into the four categories noted above — fixed costs, investments, savings and guilt-free spending.
Knowing which expenses belong in each category will help you understand the issues with your current financial plan, he said. For example, if you’re spending $1,000 guilt-free each month and only $100 on investments, this is likely a concern you need to address.
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Build Your Budgeting Systems
If you’re like many people, you might struggle with paying major expenses that fall in the middle of a pay period, Sethi said. However, you can change this by knowing exactly where your money goes.
Achieve this by creating sub-accounts in your savings, to ensure money put aside gets used for the correct goal, he said. For example, you might have sub-categories for your emergency fund, gifts and birthdays, car service and maintenance big deposits.
Cut Mercilessly on Things You Don’t Love or Need
Stop paying for things that don’t serve you. This can be as small as getting rid of an unused Netflix subscription or as large as making major cuts to housing expenses, he said.
Unlike many financial experts, Sethi doesn’t demand that you stop buying things like lattes and having dinner out with friends. Instead, he wants you to focus on expenses that fit both your lifestyle and budget.
Increase Spending On the Stuff That Matters
Once again, Sethi wants you to spend money on things that make you happy — as long as you can afford it. After you’ve allocated money to your other conscious spending categories, you should spend it however you want, he said.
Boost Your Income
If you need extra money to live the lifestyle you want, don’t reduce your savings or investments, Sethi said. Instead, seek ways to increase your income.
This might involve asking for a raise, negotiating rates with service providers, or starting a side hustle, he said. Taking these steps can create more room in your budget for things you want to do, without sacrificing your savings and investments.
Changing Your Money Beliefs
In another blog post, Sethi also noted that many people follow an “invisible script” that controls their money habits. For example, thinking you aren’t good with money, that being on a budget means depriving yourself, or that you need to make money to save could be holding you back.
Determine where these beliefs came from and if they’re currently serving you, he said. If they’re not, try to find ways to reframe these views.
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This article originally appeared on GOBankingRates.com: Here’s Why You’re Not Getting Ahead With Your Money, According to Ramit Sethi
