It is crucial to know where your money goes if you want to get your finances under control. The problem? That isn’t always obvious: Sure, you may keep track of your monthly bills. But what about your daily expenses? When you add up your out-of-pocket expenses, you might be surprised at how much you spend on things like food and transportation.
Spending can be easily tracked when you focus on a short period of time. However, as you become more aware of your spending, you will be able to identify simple changes you can make to reduce costs and increase savings.
With that in mind, here’s my action plan for saving and spending.
Yes. You Need a Budget
For some, budgeting may seem tedious or daunting. But, for others, budgeting is a straight-up challenge.
One reason is that there is a chance that budgets can encourage a restrictive financial mindset.
“Budgets don’t work for many people in the same way diets or one-size-fits-all eating approaches don’t work long term. Instead, I believe that finances are personal. In the same way that it’s not about dieting but rather eating well, I don’t believe it’s about budgeting but rather spending and investing well,” explains Melissa Browne, author of Budgets Don’t Work (But This Does).
What’s more, budgeting is even more of a chore for those with an inconsistent income. After all, to make a budget work, people must set limits on their spending, so when income or spending fluctuates monthly, it can be especially challenging.
While these are valid arguments, a budget doesn’t have to be a filthy word. Why? Here’s why.
- It only takes a couple of hours each month. After that, you can automate your budget using budgeting apps like Mint, Personal Capital, Goodbudget, or EveryDollar.
- To become financially stable, you should definitely have a budget — even if money is tight.
- Budgets don’t have to be restrictive. An effective budget is realistic yet flexible.
- You can make a budget as complicated or as simple as you want. Budgets are generally based on income minus expenses and savings.
- There are multiple budget types to choose from. A good example is the 50/30/20 Rule. The monthly expenditures and savings are divided into three categories: needs (50%), wants (30%), and savings (20%).
Be S.M.A.R.T. About Saving
The good folks at DePaul University put it perfectly; “A dollar saved every day goes a long way.”
“With a savings plan, your priorities become attainable with minimal inconvenience,” they add. “One successful savings strategy is to use a S.M.A.R.T. action plan.” If you’re unfamiliar with the acronym, it stands for Specific, Measurable, Attainable, Realistic, and Timely.
Here’s an example of how you can put this strategy into play:
- Specific. Purchase a new winter coat
- Measurable. $200
- Attainable. Limit your Starbucks lattes to twice a week
- Realistic. $50/month ($12.50/week)
- Timely. 4 months
Here’s what I like about this approach. You aren’t depriving yourself of the things in life that you enjoy, such as lattes. Instead, you’re making a small sacrifice by going to Starbucks every day. So, since you aren’t spending that five bucks five days, you’re saving $25 a week. Or, to put that another way, that’s $1,300 a year!
Also, you can use this method when setting both short-term goals, like that winter coat and long-term goals, such as a down payment on a house.
The Secret Sauce to Saving? Automation
“You know the drill: You get paid, you spend some money on bills and maybe some fun, and then you hope there’s enough left over to save,” writes Jeff Rose in a previous Due article. “But what if there was a way to take the guesswork – and the effort – out of saving money? That’s where automation comes in.”
In his book “I Will Teach You to Be Rich,” Ramit Sethi encourages people to automate their finances by saying, “The beauty of this system is that it works without your involvement, and it’s flexible enough to add or remove accounts anytime. You’re accumulating money by default.”
In other words, saving money should be easy. More specifically, you should have a seamless and stress-free experience.
“There are several ways to automate your savings,” adds Jeff. “But the simplest is probably setting up a separate bank account for your savings and then arranging for a set amount of money to be transferred from your checking account to your savings account each month.”
As an added benefit, this method helps you keep track of how much you are saving. After all, it’s easy to lose track of $50 here or $100 there when it comes from your checking account. When your savings are in a separate account, it’s easier to monitor their growth.
Set Aside Something for a Rainy Day
It is recommended that you set aside three to six months’ worth of living expenses in case of an emergency. Although this may seem overwhelming, don’t let it stop you from taking action.
For example, set a manageable goal of saving $500 for the unexpected. Depending on your financial situation, you could do this by setting aside $100 a month. Within five months, you’ll reach this goal. If that’s not possible, try $50 a month.
Trim the Fat
When you’re unable to save as much as you’d like, you may need to reduce your expenses. First, list nonessential expenses, such as entertainment and dining out, so you can spend less on them. Make sure you’re saving on your fixed monthly expenses, too, like car insurance or cell phone plans, by comparing plans.
You can also trim everyday expenses by:
- Review recurring charges. Don’t let your subscriptions or memberships renew automatically if you don’t use them. Apps like TrueBill and Trim can do this for you.
- Buy used and generic. My first stop when looking for new clothing is local thrift shops. I’ve found quality pants, for example, for around $5. Then, at grocery stores, I go generic. Now, I won’t skimp on some brands — sorry, there’s no alternative to Heinz ketchup. But, more generic items are far cheaper and just as good as brand names.
- Search for free activities and discounts. For example, free or low-cost entertainment can be found by searching community event listings. Also, there are numerous discounts for students, seniors, first responders, and members of the military.
- Only use ATMs from your bank. Then, when you withdraw money, you can avoid those pesky fees by using ATMs associated with your financial institution.
- Weigh the cost of eating out vs. cooking at home. Then, for nights when you want to treat yourself, research local restaurant deals and eat at home most of the time.
- Use cashback and rewards apps. There are a lot of features that make spending and saving fun, whether you want to save for a specific goal, reduce expenses or reward yourself for what you already spend.
- Wait before you buy. Don’t make a non-essential purchase right away. Instead, plan to save for the item if you want it more than you need it.
Understand the Difference Between “Want” and “Need”
I get it. You might really be craving some Korean barbecue. But do you really need that for dinner?
Personal finance begins with understanding the difference between needs and wants and identifying yours. Your financial goals should align with your ability to say no when something doesn’t fit.
Safely Maximize Every Dollar
Don’t let your savings go to waste. Instead, pay attention to where your money goes.
Case in point, approximately 73% of consumers are using savings accounts, according to Mintel. However, according to the Federal Deposit Insurance Corporation, the average savings account pays only 0.10% annual percentage yield. So despite a significant savings balance – say $10,000 – a small APY won’t make much difference. After 12 months, that amount would earn less than 10 dollars at 0.05% APY.
Banks that offer high-yield savings accounts usually pay higher rates. Since online banks do not have to maintain physical branches, they can provide higher rates to their customers. Putting that $10,000 into a high-yield savings account would earn 0.40% so you would have an additional $40 after a year.
With time, both the extra money and the initial deposit will earn interest. The compounding interest will increase your balance more quickly than if you placed the cash in a lower-rate savings account.
Take Advantage of Free Money
I know what you’re thinking. There’s so such thing as “free” money. But that’s not exactly true.
The most obvious example is your employer’s 401(k) match.
“If you work for a fantastic company, one of the best perks you may offer is matching your 401(K) contributions. While you may not be able to access this today, it’s yours when you retire,” notes Due founder and CEO John Rampton.
“We find that most 401k match contribution levels are tiered,” he adds. “A generous match might include a dollar-for-dollar match on the first 3%-5% of the employee’s deposit.” Most 401(k) plans then contribute 50 cents for each dollar of the following 3%, which would equal 10% of employee contributions.
“I would 100% take advantage of the first part; I also would take advantage of the 50% match for the second part as well,” John recommends. “This is all free money to you at the end of the day.”
And, believe it or not, you may also get free money from the government. For instance, some programs can assist you with housing, utilities, childcare, and healthcare. Additionally, you may qualify for grants. And there’s even free tax preparation through the IRS’s Volunteer Income Tax Assistance (VITA) program.
Level Up Your Finances
After you have outlined your savings plan, look for additional ways to save. For example, consider saving the extra funds you receive at work if you receive a raise. And, once you have built a three- to six-month emergency fund, it’s okay to move on to other goals.
Most importantly, make sure that you also invest in yourself in the following ways:
- Don’t stop thinking about tomorrow. Unfortunately, when it comes to their future finances, many people in their 20s and 30s make the huge mistake of not saving for retirement early. Instead, let compound interest grow your funds by investing in your future today.
- Build an investment portfolio. Learn the basics of investing and start investing if you want to build your wealth. Robo-advisors now make this a seamless experience. But, it also wouldn’t hurt to consult a financial advisor.
- Learn, invest, and develop your skills. Whether this is improving your financial literacy or new skills that can land you a promotion, always find ways to bolster your personal and professional development.
Pay Down Debt
“Being in debt can be a major burden,” Christy Bieber writes for The Motley Fool. “After all, you have to waste money on interest, and money is promised to creditors before you even earn it, making it harder to live on what’s left over without borrowing more.”
The good news is that becoming debt-free ASAP isn’t as difficult as it seems if you get creative.
- Paying the minimum on all your debts is fine as long as you give a little extra to one of them. Paying extra can be done in two ways: by snowballing or by avalanching. Using the snowball method, you’ll pay off the debt with the smallest balance first to get quick results. In contrast, the avalanche method entails paying all extra cash to the highest-interest debt.
- If you already have existing debt, think about taking out a personal loan at a lower interest rate than what you owe now and paying it off all at once.
- Get into extreme couponing and throw your savings towards your debt.
- Claim your cashback rewards every month and use the money to pay off debt that you’re trying to repay
- Think about making biweekly payments instead of one monthly one.
- Even though paying extra to debt can sometimes feel deprived, you may find it fun if you challenge yourself to save as much as you can each month in certain areas.
- Establish weekly or monthly check-ins with friends who are also paying down debt.
- Find additional income sources through a side gig or passive income.
Keep up with your credit report.
Did you know that the three major credit reporting agencies, Experian, Equifax®, and TransUnion®, must provide you with a copy of your credit report every year? A credit report is used by loan providers, landlords, and others to determine what you can borrow.
For example, a $20,000 auto loan with a low credit score could cost you over $5,000 more over 60 months. That’s some serious dough!
My advice regarding saving and spending has been to exercise discipline, tighten your belt, and resist instant gratification. But, there’s no such thing as a perfect person.
Knowing the importance of saving doesn’t mean you can’t spend now on the things you enjoy, relax, celebrate, or just because you can. But, there’s still a balancing act. As long as it fits within your budget, there’s nothing wrong with the occasional splurge.
Frequently Asked Questions
1. When should I start saving money?
Short answer? Right now.
No matter what percentage you put away each month, it’s good practice to start now rather than wait until later. Starting with an emergency fund is an excellent way to start saving if you are not sure what to save for. Having this stashed away can help cover an unexpected expense.
2. How much money should I save?
Ideally, as much as you can.
As a starting point, you should set aside 10% of your income if possible. In addition, it is recommended that you save at least three months’ worth of expenses for an emergency fund.
3. Where should I keep my savings?
A regular savings account is fine if you need access to your money quickly, like for an emergency. For accumulating wealth, however, like for alternatives like high-yield savings accounts or mutual funds.
4. How do I build credit?
The first step in building credit is to have a credit card. However, you should pay off your monthly balance in full when it comes to maintaining good credit. If not, you may end up owing more money over time if you only pay the minimum.
5. What is a reasonable amount to spend on fun activities?
Depending on your lifestyle and location, this will vary greatly.
According to many financial experts, food costs should be allocated 9-10 percent of your budget. After you’ve established a number, stick to it. Several different pieces of advice have been shared regarding “fun” budgets. For example, 30 percent can be dedicated to “things you want but don’t need,” and 10 percent was touted as a “fun” number.
Build your fun budget by considering what you spent on “fun” in the past year, such as nights out, clothes, or getaway weekends. However, going over your “fun” budget once doesn’t mean your entire budget is sunk.