Save More Money in 2009 - Part 1
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.
