Trying to become financially independent? Want to get on a better financial path? Have no idea how to feel financially comfortable without winning the lottery, hitting it big in the stock market or cashing in at the casino?
Despite all the claims made by “get rich quick” schemes, there is only one surefire way to get ahead financially – you have to spend less than you earn. You need to develop a plan that identifies what you earn, what you spend and what you save – you need a budget.
Motivate Yourself
Start by thinking about how you can be happier and more secure with greater savings. Set some financial goals. These goals will give you an incentive to spend less than you are taking in.
Write a saving goal for each of the following categories:
Short-Term Goal: A short-term goal should be something you can save for in the next 1-2 months. Maybe you want to pay off a credit card balance, buy a new television or big birthday or anniversary present. These are good examples of short-term saving goals.
Mid-Term Goal: Mid-term goals are for saving over a longer period of time – anywhere from two months to three years. These goals might include big purchases like buying a car or putting a down payment on a house. They might also include saving up for a big vacation like a Caribbean cruise or an African safari.
Long-Term Goal: These are saving goals for the long term – more than three years. Big life expenses like saving for college, retirement, or a second home are just a few examples.
Get a Plan
Once you’ve set some savings goals, you need to figure out how much you earn and spend each month and where exactly it all goes. Here are four easy steps to follow when writing out a budget plan:
- Start with your income. For most people this is easy to determine – what is your pay each month after taxes? (If you run your own business, this might be harder to determine, but ultimately should be the total income that comes into your bank account each month.)
- Pay attention to how you’re spending your money. Financial advisers often tell their clients to keep a journal of everything they spend for a month. You might also look at your checking account statement for the last month.
- How much are you spending each month on rent or a mortgage?
- What is the average cost of your bills (water, electricity, gas, cable)?
- How much do you spend on groceries?
- How much do you spend eating out?
- What about entertainment expenses like movie tickets?
- Identify areas where you can save. This probably isn’t as hard as you think. Clearly you have more control over your spending in some of these categories rather than others. For example, shelter and utilities tend to be fixed expenses – things you can’t control in the short term, while entertainment and cash tend to be variable expenses – things you can control in the short term. Analyze where your money goes. Look for easy ways to spend less:
- Are you withdrawing cash from ATMs and paying fees every time?
- Can you take your lunch to work instead of buying a sandwich?
- How much are you spending on gas? Can you use mass transportation or walk a couple of days a week instead?
- Instead of dinner and a movie out a few times a month, can you cook at home and watch a DVD?
- How much are you spending on lattes and lottery tickets? Are these mandatory expenses? (Answer: No.)
- Can you buy groceries in bulk at a warehouse store like Sam’s Club or Costco? Consider taking a list to the grocery store and avoiding impulse purchases. But don’t get hooked by low prices on things you don’t need, either.
- Pay yourself first. Put the money you plan to save each month in a separate bank account. Don’t approach your monthly expenses with a “save what is left over” mentality. All too often we wait until the end of the month and just save what is left over – and often there isn’t anything left. Find a way to transfer money out of your checking account and into a savings account – if you don’t see it there to spend you probably won’t! One easy way to do this is to ask your employer about having money withdrawn from your paycheck each pay period and deposited into a savings account or a 401(k) account. Then you don’t even have to think about it.
Group your expenses into categories: cash, food, clothing, insurance, entertainment, loans, medical care, housing, transportation, utilities, etc. You can use this detailed log of your expenses to give you an accurate picture of your fixed expenses and the expenses that are more variable.
Now get started! Saving and budgeting isn’t rocket science – just a little planning can go a long way. It won’t be long before you see the benefits of spending less than you receive.
