Your Income – Your Spending = Your Savings
Did you learn this basic savings formula? Its simplicity provides the answer to a frequently troublesome question: “How can I save more?” As most people cannot control their income, there is only one possible answer: Spend less.
Now, how do you do that? It seems easy to say but hard to do. Below are ten great ways to start. Even if you take just one or two to heart, you’ll be on your way to growing your bank account!
Strategy 1: Don’t become emotionally separated from your money
Remember when a grandparent or special aunt or uncle gave you a dollar bill? You enjoyed simply having money, looking at it, and even counting it. You knew exactly how much you had and planned how you were going to use it.
How things have changed! Now your paycheck is direct-deposited and you charge most every expense. You don’t have a clue how much money you have in your wallet until you find yourself at a place that doesn’t accept credit cards.
This emotional separation from your money makes it much easier for you to spend more. Try using more cash for a while and see if your expenses go down. Handing over five twenties is much harder for most people to do than charging $98.47 on a credit card.
Strategy 2: Understand and be honest about expense classifications
Think of discretionary expenses as “wants” and non-discretionary expenses as “needs.” Since there is little you can do in the short-term to reduce non-discretionary expenses, traditional spending reduction focuses on limiting your discretionary wants. Often people think of too many of their expenses as needs. However, incorrectly labeling your expenses limits your ability to take advantage of other savings opportunities. Think about the decisions you make everyday: are the bulk of your purchases really non-discretionary needs or do you just view them that way? Remember, while eating is a need, eating out is a want.
Strategy 3: The time to lower your spending on needs was yesterday
Many people have trouble saving even while limiting their spending on wants because their expenses for their needs are too high for their income level. It is you that must care enough to review your spending priorities before making that commitment to an apartment lease, mortgage, or car. Just because someone will sell something to you doesn’t mean or even imply that you can actually afford it. Although non-discretionary expenses were not needs at one point, once you commit, these expenses will require part of your monthly income for a long time.
Strategy 4: Enjoy free stuff
Depending on your interest and health, you can go on a long hike, sit in a park, talk with a friend, read a book or newspaper, lay on a beach, play sports with friends and so on. Many people feel they can’t have a good time without spending a fair amount of money. But that’s based on what’s been successful for them in their recent past as opposed to a reality of life. When you were a kid or even a college student there were hundreds of days where you had no money to spend and you were as busy and as happy as ever. Can you try a day or two like that this month?
Strategy 5: Major on the major
Don’t spend a lot of time evaluating minor expenses, like where to buy pizza. Rather, put major focus on major purchases. A car and a place to live are obviously major expenses. What else is major? Regardless of age, financial aptitude, or income, a good rule of thumb is that anything that requires you to finance the acquisition is a major purchase. Spend serious time evaluating these purchases, ensuring that you can actually afford what you are buying and that you value every feature and option you’ll be paying for over the upcoming months and years.
Strategy 6: Enjoy being with people you like
It’s the quality of your friends that will make the evening not the quality of menu design or lighting of the establishment in which you choose to meet. If a few people talk about meeting up for dinner, it’s okay if you’re the one to suggest meeting at a place similar to one you loved when you made less (or no) money. Such places cost a lot less than the new trendy yuppie place that just opened up. There are many people who will be glad to spend $15 on the evening’s food rather than $35 but just don’t have the courage to propose the alternative to the free-spending organizer. Don’t be surprised if one or two of these people thank you-in private.
Strategy 7: Don’t blow off the recurring minor
Small expenses that recur aren’t truly minor. For example, your cable bill, your cell phone plan, and potentially even your morning coffee are all recurring minor expenses. Estimate the costs of such expenses on an annual basis. Then, ensure you still enjoy a level of value in line with this cost. Don’t try to change all you habits – but can you find one recurring expense to cut? Perhaps lose the premium cable channel you never actually watch? Or, switch from a latte to a hazelnut coffee? Minor expenses aren’t really minor if they last for a long time.
Strategy 8: Spend with comfort on items or experiences you value highly
As in time management, you can’t prioritize everything financial as highly important. Life requires choices. If you don’t prioritize at the outset, in the end the choices will have been made for you because you won’t have money left for that next expense. Don’t give up that control. Know what you truly value and spend on those with no guilt – enjoy! Know that only a very select few have unlimited discretionary expenses. If you are reading this, you are not one of those people. So while you should enjoy those experiences you value highly, hold back on discretionary expenses that don’t provide you with that same emotional high.
Strategy 9: You won’t spend what you don’t see
Create a forced savings program. If you have a friend that makes 10% more than you and you have the same basic lifestyle, don’t you think he should be able to save 10% of his pay? Well, the same is true for you, because somewhere you have a buddy who’s looking at you the same way. Enrolling in your 401(k) is the easiest way to do this. If you are already in the habit of spending what you make (but no more), you will simply get used to spending less. In fact, you will have to because your net pay will be lower -you won’t have the temptation to spend what isn’t actually in your checking account. The earlier in your career you participate in such a program, the easier it is to do successfully, so don’t delay. When you’re just starting out, any pay is big pay.
Strategy 10: Constant budgeting isn’t required
It is appropriate to prepare a budget at certain key times (like making a new or increased commitment to a non-discretionary expense). However, if you prioritize your values and commence a forced savings program, you will consistently meet any strict budget objectives you would put together.