Saving And Controlling Your Spending
What percentage of my income should I try to save?
There's a rule of thumb that people should save 10% of their income and I think that's a good rule that people should follow for saving. If they have a 41(k) in their employment situation they should try and save that much of their income, up to the maximum amounts that are allowed under the tax law. Unfortunately too many people today are not saving at all and in fact they're spending more than they earn, but saving is a critical element.
How can I start saving more money?
Sometimes, depending upon the stage of life that an individual is in, they think that they have so much overhead that they find it hard to save. They have to pay tuition, they have to pay for books, they may have to pay for rent, and they wonder where they're going to get the money to save. One of the techniques that I advise them in is I ask them if they buy coffee everyday at the fancy coffee shop. Invariably, the answer is yes. When I ask them how much they spend on coffee a day, they tell me it usually amounts to several dollars. I say "Instead of buying coffee, make the coffee at home, and then take that money you're saving, and put it in a savings account. You'll find that if it's two dollars a day, just on the business days, that's ten dollars per week. That's 520 dollars a year, and that's a start for paying yourself, first."
When should I start saving for retirement?
It's never too early to start saving for retirement. In fact, the statistics have shown that the earlier you start saving, the more likely you are to achieve financial freedom later in life. That doesn't mean that if you're further along in your career you can't start, it just means that you will likely not save as much over long periods of time. I have seen some calculations where if an individual, when they first, as soon as they graduate from college, starts saving, just depositing the maximum amounts of money into their IRA accounts, and they only do it for 10 years, and then just let that money that was in there that they've deposited grow using the effect of compund interest will end up giving these savers more money than somebody who started 10 or 15 years later and just continue to deposit those same amounts up to the date of their retirement. The compounding effect of earning's growth on investments is the most powerful tool that an individual can use to save for the long term.
What is a "budget"?
People can be intimidated by the process of trying to prepare a budget. They don't know how to approach it, they don't know what to do. But actually, in its purest form, a budget is a plan. It's setting down, on paper or in a computer program, amounts of money that you anticipate spending in the various aspects of your life
How do I create a budget?
The easy way to start is with the big items. You know what your rent is going to be; it's fixed, or your mortgage payment is likely to be fixed. So, start with that. You may have a car payment, which might be a substantial payment. Incorporate that. Do a little bit of research into your own spending habits and see how much you spend at the supermarket, how much you spend for entertainment. These are your recurring expenses that you're going to have week, after week, after week. Also, don't forget that you have to plan for items that are non-recurring; things such as your automobile insurance or renter's or home insurance, which may only be paid once or twice a year. So, you have to make sure that you're planning for that as well. Additionally, you might want to plan to work into your budget such things as planning a vacation. You have to account for your vacation within the budget because if you're going to go on that vacation, but you didn't account for it in your overall spending plan, you're going to have to use credit to go on vacation and that's something you want to try to avoid. So, the entire goal is to enable you to make choices based upon the financial resources that you have from your earnings and from any investment income that you might have.
What are some tips for staying on budget?
To stay on a budget, you have to keep track of where you're spending your money. This takes time. This takes discipline. What I would advise people to do when budgeting is try to use as little cash as possible and try to use either a credit card or a debit card so that you can keep track of where you're spending money. If, however, you need or want to spend cash for things, then keep track of it. Keep a little notebook and make entries each time you spend money. You'd be surprised at where money goes that you're not even aware of. Sticking to a budget does require you to have the discipline to monitor the expenditures on an ongoing basis.
