5 Simple Steps to Balance Spending and Saving

A Little Organization Goes a Long Way

organize pileHow many times have you said to yourself on January 1st that THIS is the year you’ll organize your finances, master your household budget and figure out how much you can set aside for savings and investments?

Unfortunately, things get in the way. But organization is the first step towards getting your finances under control. First, know how much comes in every month and how much goes out.

It’s amazing how much peace of mind you can create just by creating a simple spreadsheet –- nothing fancy or complex –- where you tally your expenses every month and see how it compares to your income. It takes about 20 minutes one day every week, and it can give you a tremendous feeling of empowerment. You can even find expense-tracking apps, for those of you on the go!

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Our Mental Finance Compartments

organize compartmentMany studies have shown that people have a tendency to compartmentalize financial decisions. We’ll tell a friend that we can’t afford to go out to a movie this weekend (we’re on a budget, don’t you know?) and then turn right around and buy a fetching pair of $100 shoes.

That compartmentalization problem is even worse when it comes to spending versus savings. We don’t normally think about retirement savings when we’re making a monthly budget. But if you don’t do it, who will? Most of us aren’t covered by the kind of pension plans that earlier generations enjoyed. And we can’t count on Social Security to fully cover our retirement needs. So we need to break out of our financial compartments and think of the big picture.

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Allocate Among Financial Choices

shopping choicesBroadly speaking, we have three main buckets of financial priorities: necessary spending; discretionary spending; and non-spending. We’ll get to that rather cumbersome-sounding third one in a moment.

First, set a goal for how much of your monthly income should go to necessities such as housing, food, transportation and utilities. A good rule of thumb is use 50% of your take-home pay for these expenses.

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Third Bucket: Non-Spending

bucketNow let’s jump straight to that third bucket. “Non-spending” includes several things, such as making investments, paying down debt and saving for emergencies. Why should you jump straight from bucket #1 to bucket #3? Because you should put together a smart plan for your savings goals before you figure out your discretionary spending budget (bucket #2).

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Are You Saving?

save money balance checkbookDepending on your age and circumstances you’ll want to put aside 20-30% of your monthly income into savings and investments. Use online resources to help you decide how to put these investments to optimal use.

See what you’ve done here? By instituting moving from your monthly necessities to your savings and debt payments, you’ve figured out how much is left over for your “discretionary” spending -- things like movies and restaurant meals! Once you get into the habit, it will become second nature, and you will be on your way to a richer financial future.

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