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. The
worksheet below is a simple yet inclusive budget that 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 that you do not 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 newspapers you buy from the corner store
and trips to the soda machine. 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 that stay the
same from month to month; Other Committed Expenses -- things you
can't live without, like food, utilities, and clothing; and
Discretionary Expenses -- things you like but don't necessarily
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 are 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 to titles you don't read. Eat fewer meals out, or
choose less expensive restaurants. Across much of the country, you
can rent two videos for the price of a single adult ticket to a
movie and throw in some microwave popcorn for a dollar more.
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 taking public transportation
instead of cabs?
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 payments. Call your credit card company and ask them
for an interest rate reduction, or shop around for a card with a
lower rate. You can find lists of low-rate cards through sites such
as CardTrak and Bankrate. Beware of low introductory "teaser" 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 that 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
If your savings are still being crushed under the weight of
debt, or if you're having trouble making minimum monthly payments
and covering necessary expenses, consider getting some help. The
nonprofit National Foundation for Credit Counseling can help you
set up a budget and negotiate payment schedules with lenders for a
modest fee. 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. You may
be able to set up a payroll savings plan through your bank or
credit union. Also 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 that families with savings
goals tend to save more.
Remember that 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 are saving as much as you possibly can.