What is the best way to make sure that you keep more of your money each month?
The only way to make real progress is to spend less than you earn. There are multiple tactics to make that happen.
One popular approach is to focus on the daily items that relentlessly add up over time. Yes, the math does work. If you take that $5 a day spent on fancy coffee and put it toward savings, you will have an extra $1,825 after 365 days. If you start at age 15 with that same five bucks a day and invest monthly in a fund that averages 8% yearly returns, you’ll have over a million dollars at age 65. Coffee, eating out, drinks with friends, expensive clothes, hobbies, and vacations can all fall into this category of must have right now. But if you can forego the spend and put the money into savings and investments, you will see results.
And consider another important point. Sometimes we spend the money we’ve already earned on these items, and sometimes we let credit cards enable us to spend before earning the money. Just to be clear, that is the wrong direction if you are trying to build savings and investments. Cut up the credit cards!
The other high-impact approach to reducing expenses is to focus on the big-ticket items, such as housing, transportation and education. These spending decisions carry long-term consequences. Housing involves a lease at a minimum and a long-term mortgage if you buy. It is easy to fall in love with a place and push your spending limit. You can end up with a long-term overspending problem. Car loans are typically six or seven years and many people just expect to have car payments forever. When the car is three years old, will it be that much better than the five-year-old version that you could buy now at a much lower price? Education can quickly send personal debt soaring. Having a strategy to pay for education and minimize student loans is critical, both during and after school. You can have a huge impact on your cash outflow by managing these big items well.
So which approach is correct? The one that works for you!
While large purchases don’t happen very often, it is important to stay away from emotional decisions that can strangle future. Future articles will look closely at ways to reduce spending in these major areas.
There are two options for managing regular daily expenses. Using a budget to allocate every dollar each month and tracking spending in each category is the best method.
Radio personality Dave Ramsey originally recommended an envelope system. The idea is to devote an envelope to every category of spending, putting the allocated amount of money in each envelope as income is received. Once the envelope is empty you either stop spending on that category, or you have to take money from another envelope. In our cashless electronic world this is hardly feasible, but there are options. Two great starting points are Dave Ramsey’s EveryDollar app and the YNAB (You Need A Budget) app. Both give you the ability to track your income and expenses to the last dollar. Use a budget for at least three months to get used to the process before expecting it to be easy or to see results.
For those who can’t or won’t stick to a budget, there is another approach. Go through your financial records, bank accounts or credit-card statements, and find the one or two areas that seem to be the most out of control. Is it eating out? Shopping on the weekend? Once you have identified the area, set a realistic spending goal. Now here is the important part: Stick to that number. Track what you spend and don’t go over. Once you’ve done that for a month or two you will be surprised to find that you don’t miss the spending as much as you thought. And you just might want to add another category to control where your money is going. You’ll be a full-blown budgeter in no time.
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