Americans, it seems, are spenders. Personal savings rates are low, and many people spend beyond their means.
If you’re among those Americans who can’t seem to save, it might be time to create a budget. A budget allows you to understand where the money goes and may help you free up cash for important savings goals, such as college and retirement.
Setting up a budget will require some work, but the benefits more than offset the time invested. How you create your budget is up to you. You may choose a piece of financial planning software such as Quicken, or you may choose the paper and pencil route. You can use My Monthly Budget Worksheet as a simple yet inclusive budget you can use to get started.
The first element of any budget is your income, or how much money you receive each month. This can include paychecks, legal settlements, alimony, royalties, fees, and dividends from investments you don’t reinvest. Once you know what your monthly income is, you can use a budget to make sure you don’t spend more than you earn, thus helping to reduce debt and freeing up cash for savings.
Next, you need to know how you spend your money. Start by tracking your spending for a month. Gather bills and receipts, and don’t forget to include lottery tickets you buy from the corner store and trips to the coffee shop. Don’t assume any expense is too small to record.
Write down your expenses and break them into categories. Using the budget worksheet as an example, we find:
|Fixed Committed Expenses||
Mortgage, loan and insurance payments stay the same from month to month
|Other Committed Expenses||
Things you can't live without, like, food, utilities and clothing
Things you like but don't necessarily need
Less spending = more savings
Once you know where the money goes, it’s time to analyze your expenses. There probably isn’t much you can do about Fixed Committed Expenses without moving or getting rid of the family car. However, if these expenses are greater than your monthly income, you’re probably carrying too much debt to effectively save.
You may find some room to economize in Other Committed Expenses, but look at Discretionary Expenses first. This is typically the easiest place to reduce spending. Begin by canceling magazine subscriptions you don’t read. Eat fewer meals out or choose less expensive restaurants. Watching free movies from Amazon Prime can save you the price of a movie ticket and throw in some microwave popcorn.
Once you’ve reduced discretionary spending, look at those Other Committed Expenses. Can you reduce the grocery bill with coupons or more economical meals? How about going to the grocery store instead of ordering Postmates or Uber Eats?
One area to closely examine is credit card debt. If a high balance is keeping you from saving, you need to find ways to trim those monthly payment. Call your credit card company and ask them for an interest-rate reduction or shop around for a card with a lower rate. Beware of low introductory rates that increase to much higher rates after six months.
You could also consider a home equity loan, which may offer a tax deduction, or a consolidation loan. Make sure you’ll be able to afford the monthly payments before you take the loan. Banks can foreclose on a home equity loan within 90 days if you miss payments.
If your savings is still being crushed under the weight of debt or you’re having trouble making minimum monthly payments and covering necessary expenses, consider getting some help. We offer free financial counseling to our members. Once you start paying off your credit cards the extra money can be used to build savings.
The goal: more savings
Once you’ve figured out where to economize, you can enter amounts in the Expected column of the budget. Notice that Savings and Children’s Education appear under Fixed Committed Expenses. This is to encourage you to pay yourself first, a key rule of saving. By setting aside a certain amount each month for savings, you can build toward your goal without missing the money. Look into any employer-sponsored retirement plans you may have at work, which potentially offer tax benefits along with savings for the future.
It might also help to set a savings goal, both for short- and long-term needs. Studies have revealed families with savings goals tend to save more. Remember your budget is a living document. As your circumstances change, so will your goals and needs. Review your budget every few months to make sure it reflects your goals and to see if you’re saving as much as you possibly can.
Source: LPL Financial