Last week, we discussed why the ‘save money’ mantra is ineffective for many people. Especially those folks who earn in the lower quintiles. This week, I want to flip that script just a bit and address those who do have better incomes and can save some cash, but simply are not. A reminder, if you will, that saving money really is a necessity. And, that you should save as much as possible.
I’m not going to focus on saving X amount by a certain age. Nor am I going to cover how much to save per pay period. For those of you earning better incomes, you know (or should know) your monthly net income, and thus, how much you have to work with. Establishing better money habits and knowing why you are saving is the more important first step. Once you know your goal, and amount available to you, we can work on the mechanics of your plan. Here are your better budgeting and cash management tips.
Get back to basics. This is a task that many do not like. I get it, it can be tedious for some. The goal is to help you be better with your money. The first thing you need to know is your cash flow. How much is coming in every month, from where, what source? The flipside is cash flow out. What are you spending on every month? You have to create a system to track this flow of funds. You can use an app, a notebook, pen and paper, or a spreadsheet. Whichever tool works for you and that you will actually use. If you need a spreadsheet, let me know. I have a couple of great options. You may need to track this over several months to get an accurate gauge of your spending.
Work together if you are part of a couple. Go over all the expenses and income so you both have a solid understanding of how much you have to work with each month. One person shouldn’t have to be the responsible bill payer and the other person not be aware of the money flow. You can split tasks, but at least sit down regularly and discuss your cash flow.
Set realistic goals. Saving pots of money and paying down debt doesn’t happen quickly. But you can set realistic goals and timelines. Start small, use SMART (Specific, Measurable, Achievable, Realistic/Relevant, and Timely/Time bound) to guide your goals. If you have to, graph it out and be sure to track your progress.
Delay costly purchases. Put yourself on a timeline, say 30 days, and ask yourself frequently if you truly need the item under consideration for purchase, or if it’s a want. Many times we have an urge to buy something shiny, new, and pricey, but in reality, we don’t truly need the item. All I’m saying, is put a pin in it for a while and really weigh the purchase to determine if it’s necessary. Maybe you can rent a similar item, or buy one secondhand.
Use a budgeting approach. This can be the old-fashioned envelope method, the zero budget, or something like the 50-30-20 Rule which is the Gold Standard of budgeting. With the 50-30-20 Rule you allocate 50% of your money to absolute necessities, 30% to wants, and 20% to savings and investing. Your initial ratios may be different, so be patient. It’s the Gold Standard and that can take time to achieve.
Don’t focus on going to the penny! Leave some room in your budget for surprises such as unexpected expenses. I’m not advocating you ignore large sums, but don’t obsess over every penny when you budget. Each month’s income and expenses will vary and you need some flexibility.
Aim for building and maintaining an emergency fund of at least six months’ worth of expenses. Note that this is not six months of income, it should be total expenses. This money should at minimum be kept in a designated, high-yield savings account. Hint: likely not a major, brand name retail bank.
Finally, rinse and repeat. That’s right; review regularly, adjust goals as needed, and repeat the process. You need to revisit your spending and saving regularly because it does change. Change is the only constant.
As an independent CERTIFIED FINANCIAL PLANNER™, I can help you break those bad spending habits and route that money to pay down debt, and save and invest. Contact me and let’s get started on creating some peace of mind. #talktometuesday #financialplan #letsmakeaplan #CFPPro #todolist #moneydolist #save #invest #budget