How to Save More Each Month
Okay, so you've said to yourself, "self," ('cuase that's what you call yourself when you're talking to yourself), "self, how do I save more money each month to be able to afford these accelerated debt payments that Eric is talking about?" At least, that's what you should be saying after reading my "financial freedom" page. I have two words for you: Inflow (or Income) and Outflow (or Outgo).
That's it. There is no secret to succesful financial management other than Inflow must always be greater than or equal to Outflow. Most people would like Inflow to be substantially greater than outflow, but some of us don't have that choiice. You will, eventually, if you follow the debt free living advice I'm passing along. In the meantime, like most people, you probably need to find a dollar each week that you can put towards your debt so you can narrow that down into something more manageable. Here's how to keep Inflow greater than Outflow.
Step 1: Keep track of what you spend. If you do nothing else, do this. No need to get a fancy computer program or learn double column accounting techniques or anything like that. Just get a mini-spiral notebook you can keep in your back pocket. Every time you spend money, write it down with the date, the amount, and what it was for. If you do want to get fancy and get a computer program, Microsoft Money and Quicken seem to be the dominate players today. You can also just use a spreadsheet program of some sort to keep track of things as well. Without this information, the rest of this is impossible.
Step 2: Examine what you're spending. Now that you've got things written down, you know where you spend your money each day, week, and month. Let's deal with months, since averages tend to work bettter and the math is easier. Most of the time, people are surprised to learn how much money goes towards things that cost very little. It adds up. That $3.00 each week for the Saturday and Sunday paper is $13 per month. Eating out at the workplace cafeteria at $5 a shot is over $100 per month. Pizza night every Tuesday is easily another $100 a month for a family of more than two, and that double half-caf decaf latte with low-fat cream and cinnamon on top? At $2.95 a cup (where can you get that) each day, that's over $60 each month.
Even if you decide you can't live without these things, try dropping the Saturday paper and eating the food things every other day or every other week. That's a 50% savings right there, and that means over $130 in savings each month. Of course, you might not be spending like this... So look for things that aren't as obvious. Here are some thoughts:
- Use coupons, but only for things you normally buy. If you do use coupons, try to maximize your savings by doubling or tripling the coupon while the item is on sale. If you're really lucky, you can combine it with a rebate and make money.
- With today's gas prices, saving petrol is obvious. Typically, it's a waste of money to drive around looking for cheap gas. It is a commodity that changes price during the day, let alone during the week. Find a station you like, trust, and has acceptable prices, and continue to use that station. Preferrably, on your morning commute before the news of the day jacks prices up and while the air is cooler so the gas has condensed more and fills up more volume in your tank.
- Save every type of energy you can: electricity, natural gas, heating oil, propane, coal, nuclear fuel rods, whatever you use. Every dollar less spent per month here is one more you can put towards debt.
There are, of course, many ways to save extra money, but most invovle a change in lifestyle. The thing that you have most control over in the income, taxes, and expenses category is expenses. Movies, DVDs, concerts, eating out, eating in, electricity, vacations, trolling around town in your low-low, and that cell phone that is so indispensible are all things you have control over. You can choose not to do them, not to spend money on them, and use that money for something else. Doing so will not only increase the amount of money you have for getting rid of debt, but by decreasing your monthly expenses, you decrease the amount of money you need to save for a six-month cushion.
Step 3: Plan what you're going to spend next month (and beyond). Once you know where you spend your money, and then cut back in places that aren't crucial, you can plan how you're going to spend your money in the future. This is called budgeting and is something that scares most people. I think it's because they hear about the political budgetary process and think that if the government doesn't know how to stay within their $4 trillion budget how can anyone make a $50,000 budget and make it work? (By the way, $4 trillion isn't as scary as $3,998,000,000,000.00, which is the actual budget outlay for FY 2009 for the United States). It's easy. Remember: Inflow must be more than Outflow.
Take a piece of paper (or a spreadsheet, or whatever) and write down broad categories of things that you spent money on last month (remember that notebook?). This might include things like Eating In, Eating Out, Gas, Rent/Mortgage, Clothing, Entertainment, Electricity, Alimony, or Texas Hold'Em. These go down the left hand side. Across the top, write the names of the next six months. Can you see where this is going? Where category meets month, write how much you plan on spending for that month in that category. At the bottom of the list, add up the column (can you see how a computer might come in handy?). These numbers are your monthly expenses. Also known as your Outflow.
You can get more precise by adding specific expenses that occur in certain months like car insurance or your domain registration renewal. You can also make sub-categories like gas for the car versus gas for the lawn mower (did you know that a modern lawn tractor will use 3 gallons of gas to cut four-five acres of grass? That's about $2.00 per acre, on average). The more detail you add, the better prepared you will be when next month comes and you look back at how you did this month.
We're going to take a side trip for a minute and talk about the emotional process that takes place (or does for me) when budgeting. Choosing to skip pizza night every other week may not sound like a lot of savings so why should I give up something that makes my life worth living? Here's where personal choice comes in. You have free will. You can decide that pizza night is what needs to stay, and that disconnecting the hot water heater and taking cold showers is the way to cut expenses. It's entirely up to you. I'd recommend taking a close look at needs versus wants though, and erring on the side of needs.
As you start seeing where your money went, it's natural to get a little rough on yourself and over-compensate. Don't cut out pizza night entirely. Just make it a treat instead of a ritual. Don't eat food that's not good for you just because it's cheaper. You need to take care of yourself first, your family second, and then worry about money.
When you start to develop your budgeting capabilities, you'll see that it's a regenerative process. Each month that goes by where you spent less than you said you would is cause for celebration - and maybe you can further reduce your planned expenditures for next month. Each month you spend more than you planned for is also cause for celebration - you're still alive and you can still make choices about the future. Don't knock yourself out because you went over your budget. It's not the end of the world!
Step 4. Examine your progress. Each month, or if you're like me, each week, set aside some time to examine how you're doing. Keep on keeping track of what you're spending (still remember that little notebook?). Keep on making new guesses as to what you'll spend next month. And at the beginning of every month, look at how you did. Add up your expenditures and compare your actual Outflow to your projected Outflow for the previous month. The numbers should more closely match as time goes on. If you consistenly have different numbers, then you need to pay more attention to what you're spending and exercise your free will appropriately. Going over your budget every month is not the way to financial freedom.
By performing these four steps, you'll know where you're spending your money each month, and you'll be in control of what you're spending it on. This is the way to give yourself an extra $5 or $10 or $100 or $1634.95 each month to put towards eliminating that debt. It's not the size of the contribution that counts, it's the commitment that led you to contributing. Continuing to reduce your monthly expenses is the best thing you can do for your financial future. Spending less is like earning more.
Note: Though I am not a licensed financial advisor, I am a smart guy. And I know how to use Excel. Your mileage may vary, and all numbers and calculations are figurative only, but I think you get my point.