Category — Saving Money

This post is part of the New Year’s Resolutions series running for the first week of January

One of the most common New Year’s Resolutions is to save more money. So far this week we have covered productivity and your career. Building a solid income stream is the first step, the second step is to keep as much as possible.

If you’re going to save more money, you need to know where your money is going. This doesn’t necessarily mean you need to create a budget, but it does require you to get a solid grasp of where your money goes every single month, and tracking to make sure you stay within your predicted spending. Okay, that does sound a lot like budgeting, but it’s not that bad, I promise.

The very first step to creating a spending plan is to determine what goals you would like to meet this year. Do this before doing anything else, including figuring out your fixed costs. Think about every money goal you have. Do you want to save for retirement, maybe even maxing out your retirement accounts? Maybe you want to save a down payment for a house, or save for a new car. Maybe saving for a vacation is in the works, or even saving for a new plasma television. Whatever it is, I won’t judge. What matters is that these are your goals that you want to reach.

Once you’ve figured out how much you want to save, you need to break it up into a monthly amount. Maxing out an IRA for example, would require you to save $416.67 a month to reach $5000 in one year. Saving $5000 for a car would require you to save another $416.67 a month. It can be daunting to see how much money it takes to save these amounts, but we need to be realists, and if you want to reach your goals you need to break it down into steps and take each step one at a time.

Once you’ve determined how much of your income needs to go towards your goals, look at your fixed costs next. These include things like your rent/mortgage and utilities. The last thing to consider is your variable expenses. These are the food and gas bills. Add all of these expenses up, and hopefully you came out close to your monthly income. If you did, awesome. If you didn’t, it’s time to go back and take a look at everything and see what needs to be trimmed.

There are, of course, three main areas that you can cut back. First is your variable expenses. You can try to eat less, or eat cheaper. An especially easy way to cut back is to eat at home more and eat out less. Eat at home exclusively for one full month and I guarantee your bank account will be fuller at the end of the month.

The next area to look at cutting back is your fixed expenses. You could downsize to a smaller home to save money. This has the added benefit of lowering your utility bills since you now have a smaller area to heat or cool. Moving to a smaller home might also force you to sell off some of your stuff, which can give you money to put towards those goals your wrote down in step 1.

The last area you can consider cutting is your goals and dreams. But if your ambitions are reasonable, and I think trying to max out your retirement savings, or saving for your next car, is a completely reasonable thing to do. So I would recommend thinking long and hard before cutting back on these things. It’s easy to tell yourself that you can save later.

But if not now, when?

Every year you don’t save for your retirement is a year wasted, especially considering the magic of compound interest. The younger you are when you start saving the better off you will be in the end. And what about saving for a car? If you are driving a car now, eventually you are going to need a new one. And if you don’t save enough to pay for it outright, you’re going to need to finance it, at which point it will become a fixed expense for you anyways. So why not make it a fixed expense now and let that compound interest work for you again?

The point of doing this is to realize that life is about trade-offs. If you want to actually reach your goals, you are probably going to have to make sacrifices here and there. Creating a spending and savings plan gives you the opportunity to sit down and really thing about what will make you happy in life. Would you be willing to give up eating out 3 times a week if it meant being able to take a vacation once a year? Would you drive Honda Civic instead of a BMW 7 series if you knew it meant you could retire free from money sooner?

These choices are up to you. Like I said, I will not judge someone who decides that they would rather give up part of their lives working to pay for things. I like gadgets, and I definitely spend money on things (you can check out my flickr stream if you want to see my current expensive hobby), money that I should be saving. But doing the exercise above has shown me that I can meet 80% of my major goals, like saving for retirement or funding a fun trip with my wife, while still buying fun toys like digital cameras. It has meant that I have given up eating out once a week as well as giving up cable, but I am fine with that.

For part 1 of being more productive I wanted you to consider the things that are most important to you. This is an extension of that. Sit down and think about what is most important to you, and figure out if the way you spend your money reflects that. If it doesn’t it’s time to make some changes, and that’s what the New Year is all about.

Christmas? What? Didn’t that just pass a few days ago? Why should I worry about Christmas day now, especially a Christmas that’s almost a full year away?

I’m glad you asked. If you’re like a lot of people, you probably wanted to spend more money on Christmas gifts than what you actually had saved. If you’re like a lot of people you probably went ahead and paid for your gifts on a credit card with the intention of paying it off “soon.” Hopefully soon is next paycheck. Hopefully you don’t intend to keep paying for Christmas gifts over the next few months.

Whatever you plan to do with your credit card, next year we’re going to do Christmas different. Next year we are going to have enough money to pay for all of the gifts we buy for everyone. The key is to start saving now.

First things first - you are going to need a place to keep that money until next year. Preferably that someplace safe earns a decent interest rate, and is someplace you don’t look often, like your normal bank account.

An ING savings account is an ideal place to put that money. I don’t have any affiliation with ING, I just happen to use their savings and checking accounts and I have been very happy with their products and service so far. If you need help getting started with ING, I previously wrote about using ING sub-accounts.

Once you have your account opened and named ‘Christmas Account’ (for good measure, this isn’t really necessary), we can get started with the savings. You will need to figure out how much you spent this year on gifts. Make sure you factor in everything you spent, including wrapping materials, bags, and Christmas cards. Don’t forget about any gifts you bought for coworkers or other people who may slip out of your spending memory. We want to make sure we have an accurate number for next year.

Now divide that number by 24, and you will have the amount of money you need to save every paycheck for next year’s gift giving. This assumes you get paid twice a month. If you were paid every other week you would divide by 26.

Here’s an example. If you spent $500 this year on gifts, you would divide $500 by 24, which gives you about $21 a paycheck. Not too bad, right? And over the course of a year, you might earn a little bit of interest on the side, instead of paying interest on a credit card.

Every time you get paid, put the necessary amount of money into that account first thing. Don’t touch it for anything. Better yet, set up an automatic savings plan that will pull that money out of your account automatically so you don’t have to worry about it. Think of that payment as a bill that you need to pay. When December rolls around and you have enough money to buy everyone gifts without resorting to the credit card, you’ll be glad you did.

One More Idea

If you got stuff this year that was nice, but maybe isn’t stuff you want to keep, consider re-gifting it next year. Get a sticky note out, write down who gave you the gift in question, and put it away until next year.

When the time comes, pull it out, look at the sticky so you don’t give the gift back to the same person, and give it to someone you think will enjoy the gift. You’ve saved yourself from having more things around that you don’t need, you saved a small space in a landfill, and you are saving yourself some money.

For anyone using a Mac, Macheist is giving away free software on Christmas day at The Giving Tree.

You can pick up two free aps now, and four more on Christmas day. I hope the aps are good!

After rent, food makes up the largest part of our budget every month. In the past we haven’t worried too much about how much we spent at the grocery store, as long as we weren’t buying things that were ridiculously expensive like lobster or filet mignon. But with my wife’s layoff and the subsequent reduction in income, it makes sense for us to start paying attention to the choices we make when shopping, and putting a limit on how much we spend.

There is one major caveat for us though, and that is that quality is a priority. We would rather spend more money on food that’s tasty and healthy rather then spend less money on cheap processed junk food. If organic fruits and vegetables look better, we will buy those. On the other hand, sometimes the organic section is full of half rotten food, in which case we go with the non-organic. We like buying our meat and fish from Whole Foods when we can because the quality tends to be higher than what we can find at the Safeway or Costco in our area.

With that aside, here are the major steps for developing a food budget that you can stick with.

1. The first step is to figure out a monthly budget, then a weekly, and finally a daily. This will be the guide for planning your meals. Say for instance that you want to spend $700 a month on food. If your monthly budget is $700, your weekly budget would work out to $175, and your daily budget would work out to about $25 a day.

Take your daily budget, divide it by the number of meals in a day, and you have the rough cost per meal. In our example above, one meal should be about $8 total. One thing to keep in mind is that not all meals cost the same. I usually eat cereal in the morning, and the cost of milk and cereal for the week breakdown to less than $8 per day (It’s probably closer to $1 a day). This means that some meals, like dinner, can be more expensive than others.

2. Think of menus in 3-day blocks. So start with your daily budget from above, which is $25 a day in our example. Now consider a 3 day block, which is $75 worth of food. Instead of trying to spend the same amount of money every day, balance one expensive meal with two cheap ones.

Suppose you want to have steaks one night. You can balance those out with cheap pasta dishes the other two nights. Eating a nice meal every few nights is good for your budgeting moral, and will hopefully keep your cravings down for a meal at a restaurant, which is likely to be even more expensive than splurging at the grocery store.

3. Buy things on sale. This sounds obvious, but it’s not something we always do. You can buy some foods, like meat and cheese, while they’re on sale, freeze them, and then eat for weeks. So it makes sense to stock up on these things while they’re cheap and use them throughout the month.

Anything that is nonperishable or that can be frozen is ideal for buying in bulk when it’s on sale. Canned goods, pasta, meat, and cereal are just a few ideas.

Also be on the lookout for in-season fruits and vegetables. Not only are they fresher and better tasting, they tend to go on sale more often than out-of-season goods that have been shipped from other countries.

4. Stop eating out and learn to cook at home. For some this is going to be a difficult choice to make, but also one of the biggest ways to save money every week. Go back to your per-meal budget that you figured out in step 1. More than likely eating out, even at a fast food restaurant, will quickly break that limit.

Learning how to cook well is definitely an investment that will pay off over your lifetime, especially if you have kids to feed. It’s worth buying a few key cooking tools and books to get yourself started. They will last forever, and will make the process much easier and more enjoyable. I also recommend sites like Recipezaar and epicurious for finding free recipes when you want to try something new.

Even if you decide to throw together a nice meal it will often be significantly cheaper then it’s restaurant counterpart.

Those are the big things I can think of. If anyone has tips they follow at home I would love to hear them. Feel free to leave a comment, or send me an email and maybe I will create a follow-up to this post.

So today I filled the tank of our Mazda 6, ending the final week of my month long driving experiment of driving slower and a little less aggressively. This week I took it a little farther, driving even slower than usual and being careful to accelerate slower.

This week I managed to get an amazing (for me) 29.6 mpg. This is a fairly large jump since I started at the beginning of the month, and I am actually fairly surprised at what a difference slower driving can make. Although my results are not nearly as good as the results on the Wisebread Blog, I think they’re pretty good.

The jump in miles per gallon from the beginning of the month is almost 4 mpg. On a single tank of gas 4 mpg takes us 56 extra miles, or the equivalent of about 2 gallons of gas every single week. Although driving 55 mph on the freeway is extremely annoying, I will likely keep it up since I have now seen the effects of driving slower.

I encourage everyone to consider their driving habits and slow down when driving. With gas pricing hitting the prices that they are every little bit helps. Next time you get that chain email saying to boycott the gas stations, drive slower that day to conserve gas. It’s good for your wallet and good for the environment. And in the long run that’s far better for all of us.

Saturday was the first day that I filled up my tank since starting the driving slower experiment that I began at the beginning of the month.

I made it 393 miles before the low fuel light came on, which is a lot more than usual. I put in 13.8 gallons, giving me about 28.5 mpg, pretty good considering the maximum highway mileage is 29 mpg. Unfortunately regular gas was $3.99 a gallon!!! Yikes! So I didn’t save much money. At least I’m not driving an SUV.

So I would say week 1 was a success. Week 2 is not off to a great start, a road trip for Mother’s Day involved some fast driving, and Monday I was late for work, which also necessitated faster driving. I will get back on the ball though, I promise.

There is a post up on The Consumerist on 12 Ways to Save Money Without Scrimping.

There are a few that I think are especially good, and are more of tweak to the way you think rather than a way to save money. The first tip is an important fix for people who like to spend time shopping. If you’re idea of a fun time is to spend money then saving money is going to be a major problem.

The second tip is a way of thinking that has helped me and my wife to spend less money. Every time I think about spending money, I think about having a larger bank account balance or a lower credit card balance. It doesn’t work all of the time, but it works enough to help.

Use the things you own

One tip I would like to add is to use the things you own. When I think about buying new stuff I look around and think about the things I have that I haven’t used lately. When I think about buying a new book I look at the ones I have. Books can take a long time to read, and I admit that sometimes I lose interest in a book before I finish reading it.

Before buying a new movie decide if you can watch one at home instead. If there is a new video game out decide if you would rather play one you have already.

Sell the stuff you don’t use

Because I don’t like the number 13, I thought I would add one more tip to bring the total to 14. If there are things in your home that you don’t get regular use out of, sell it on Craigslist or eBay. I have been putting stuff up on Craigslist and it’s nice to not only free up space but to also get some cash on the side.

I encourage everyone reading this to think about one way they can save money this week. Is there something you could put up on Craigslist to make a quick $40? Could you spend some time at home watching a movie on your shelf instead of going to the movie theater? Could you cook dinner and use your home kitchen instead of going out to eat? Hopefully everyone can find something this week.

If you have any ideas or stories, please post them in the comments!

So I have read a few articles saying that driving slower can significantly increase the miles per gallon your car gets, thus saving you money. To test this theory I will try to drive slower for the next 31 days of May.

I usually fill the car’s gas tank up when it’s on empty so that I can minimize trips to the gas station. One tank of gas is 14 gallons and will get me about 360 miles. That works out to about 25.7 mpg (360 miles / 14 gallons).

Fuel mileage on the car is 21/29. I do about 75% of my driving on the freeway, and the rest on the streets. So I should get:

21 mpg * (.25) + 29 mpg * (.75) = 27 mpg

That’s an increase of only 1.3 mpg over what I get now. Not much, but I’ll take it if I can get it. The challenge will be to get the savings without losing patience.

The rules

I will not drive faster than 65 mph on the freeway. Frequent use of cruise control will be a requirement since 65 feels like you’re walking on California freeways. I will accelerate slower, and try to brake less. I think a good description I read once was to “pretend you have no brakes.” This will be tough in morning rush hour when tailgating is a must to keep other drivers from cutting you off.

The results

When I fill up I will take the miles driven divided by the gallons put into the car to get my gas mileage. So we will see if driving a little slower and less aggressively can actually make a significant change in the cost of gas. I encourage anyone else reading this to take up the challenge and drive a little slower for the next month, and post your results in the comments. It would be interesting to see if people driving different vehicles get different results.

By far the most difficult part of getting out of debt is not incurring more debt. A while back I started an extra savings account to save for new gadgets, namely a new dSLR camera. But every time I save a decent amount of money in the account I decide that I would rather put that money onto my credit card to pay it down further. It has been great for paying off debt, but not so great for me actually getting a camera. So far I have been patient, but it’s getting tougher to resist the siren call of spending.

Flexo at Consumerism Commentary has a post about frugal lifestyles and whether we are missing out on some of the fun things in life. I completely agree with the analysis, and feel that it’s important to strike a balance between planning and saving for the future and enjoying your money now.

The followup article was also interesting, noting that actually having money provides a lot of freedom that “stuff” will never provide, particularly freedom and time. When you have enough assets to cover your living expenses, you no longer have to worry about a job and you are free to do whatever you want with your time.

How does this fit in with me wanting a new camera? Right now I still owe a lot of money on my credit card, and I feel that no matter what paying that off is priority #1. Although I would rather spend my money on fun stuff like gadgets and vacations, my debt is not going to go away on its own. My debt was incurred buying “fun stuff” when I couldn’t actually afford them, and now I am paying for it (with interest no less). But once that debt is paid off I shouldn’t feel so guilty about spending money, as long as the spending is kept within reason. On the bright side, I still have a lot of cool stuff sitting around to keep me occupied until then!

I just hope that I can keep up this mentality for another year while I continue to payoff debt and then build an emergency fund. Patience will be key.

Anyone care to comment on when they think it’s okay to spend money versus saving it for the future (especially if young ones are in the picture)? Cheapo, I know you’re out there somewhere! Let’s hear your thoughts!

Just a quick run through some numbers to get you thinking about another reason you should try to reduce your expenses and save for retirement.

Suppose you had $400 in monthly debt payments, and your tax rate was 20%. You would have to earn $500 a month before taxes to make a $400 debt payment. So once that debt is paid off, you can now contribute $500 a month to a pretax retirement account such as a 401k or IRA and still maintain the same budget you had when you were making the debt payments. So now not only are you not paying interest on your debt, but you can now save an extra $100 a month not paying the tax man. That works out to an additional $1200 a year that you can keep to yourself on top of the $4800 saved from not making debt payments.

Now of course if your tax rate is higher you will save even more money by paying off debt and investing in a tax advantaged account. If your effective tax rate is 30%, you will need to make about $572 to make $400 after tax. [$572 * 0.70 = $400.40]

Pay off that debt and you will have $6864 that you could contribute to a retirement account. With that retirement account growing at 9% a year tax free, you will have over $1 million in about 30 years. Start doing this at 30 and you can be a millionaire by the time you’re 60. And thanks to the miracle of compound interest, you will have $2 million in another 8 years at 9% interest. All because you reduced your expense $400 a month. Pretty cool, huh?

Stay tuned as I start a series on retirement accounts and investment decisions. And as always please fee free to leave a comment with any questions, or email me at rich@freefrommoney.net