Get a Grip on Spending

Unfortunately, most people approach saving all wrong, first paying their monthly bills and then saving anything that's left over. But because it's too easy to fritter away money when you have it, it's better to set your savings goals first and then make your budget work around them. As you'll find out in this article, your budget probably has far more flexibility in it than you think. By taking a hard look at where your money goes and changing a few spending habits, you'll be able to find many ways to free up extra money for saving.

As you sit down to examine where you and your partner have been spending money, you must promise not to judge each other (or yourself) for overspending. Everyone gets sloppy in their spending sometimes. What you're doing here is turning over a new leaf. It doesn't matter how bad you've been in the past. What matters now is that you are committed to getting your spending under control. By uncovering bad habits you can see how far your newfound discipline will be bringing you.

Although we are focusing on reducing spending so you can free up more money for saving, this doesn't mean you have to live like a pauper. It all depends on your income and your goals. If you are able to save enough for retirement, college, and all the other things on your goal list and still go out for dinner every night, no one says you shouldn't do this. It's only when such extravagances come at the expense of long-term planning and threaten your future happiness that they should be curtailed.

On the pages that follow, you'll be learning some ways to cut the fat out of your budget. But what if there is no fat in your budget? What if you've already cut back in every conceivable area and are still having trouble making ends meet? In this case, you may need to work on the income side of the equation. Ask for a raise, look for a better-paying job, consider taking a second job until the pressure eases, or even hire yourself out as a cook, errand-runner, child care provider, handyman, tutor, or whatever you're good at.

Track Your Expenses

Do you know where your money goes? Most people don't. Even people who are conscious spenders are often surprised when they pull out their spending records and see that they spent more on certain items than they thought they had. Granted, tracking previous expenses is like studying ancient history -- you can't change the past. But it can provide insights into your spending patterns so you can get a handle on how much it really costs you to live.

The first step in tracking your spending is to pull out your spending records for the past year. Your checkbook register and your credit card bills should be all you'll need, since things like utility bills will be entered in one place or another. Put each expense into one of the following categories:

·        Housing and utilities

·        Food (including restaurant meals)

·        Transportation

·        Clothing and personal items

·        Recreation and travel

·        Clothing and personal items

·        Medical and dental

·        Debt repayment

·        Insurance

·        Income taxes

·        Savings

Once you've classified each expense, go over each entry and determine whether it's a "had to spend" or "didn't have to spend" item. This will be a subjective judgment and may spark a lot of family discussion -- which is a good thing -- because it will help you all reach agreement as to which items are discretionary and which are mandatory. Is a weekly manicure mandatory? It may be in households where such an expense doesn't hurt the savings plan. On the other hand, if the family never takes a vacation because there never seems to be enough money, the manicure expense might better be directed toward the vacation fund. These are the kinds of choices your family will be making as a result of this exercise.

If you pay for most things by check or credit card, it will be easy to see where your money goes. But if you are one of those people who spends a lot of cash and makes ATM withdrawals whenever the wallet is empty, you may be letting a great deal of money slip through your fingers. How do you know how much of that cash was spent on mandatory versus discretionary items? Chances are, you don't. To really get a handle on your spending, start keeping a notebook of every cent you spend. Yes, it's a pain. But if you have a feeling that your spending is out of control and you're not sure what to do about it, keeping precise records is the best way to understand your spending habits so you can break the bad ones and keep the good ones.

What Stays, What Goes?

Once you have categorized your expenditures over the past year and classified each as a "had to spend" or "didn't have to spend" item, you can draw up a realistic budget that will serve as your spending guide for the future. This doesn't mean your budget won't include some "didn't have to spend" items -- remember, this is not about deprivation, but rather about finding a way to achieve your longer-term goals by directing more of your money into savings. What you're aiming to do here is eliminate those frivolous, unthinking expenditures so you can save the money for other things that you want even more.

• Utilities: Your rent or mortgage payment is already fixed so, unless you're willing to move, you can't do much about this rather large portion of your budget. However, take a closer look at your utilities. Do you really need cable TV? Can you turn down the thermostat a few notches to save on heating bills in the winter?
• Groceries and dining out: Depending on your eating habits, this category could be wide open for improvement -- especially if you buy a lot of convenience foods and eat out a lot. Examine your food-buying habits to see where you can cut corners without sacrificing quality and nutrition. As a matter of fact, a diet of nutritious foods, such as whole grains, beans, and fresh fruits and vegetables, costs less than a less nutritious diet of processed foods and restaurant meals.
• Transportation: Review your car payments, car insurance, gasoline, repairs, parking fees, tolls, and public transportation. Driving an older car cuts car payments and insurance. Parking farther away from work may cut monthly parking fees. Examine your transportation costs to see where you can cut.
• Clothing and personal expenses: Instead of updating your wardrobe with whole new outfits, buy accessories instead. Wear classic clothes that don't go out of style. Cut back on haircuts, facials, manicures, pedicures, massages, and other personal items. Evaluate the gym membership: do you go often enough to make it worth it? Could you join a less expensive gym?
• Health and medical expenses: Look for ways to save on prescription drugs by buying online or asking your doctor for less expensive drug equivalents. Consider having your teeth cleaned once a year instead of every six months (be sure to brush well and floss daily!). Buy contact lenses in bulk. Look for ways to save, but don't sacrifice your health to do it. Adopt healthy living habits.
• Interest rates on debt: There may not be much you can do to reduce your monthly debt payments. In fact, you may want to increase them to get out of debt faster. Look at your monthly credit card bills and add up all the interest charges you incurred during the past year. Is it scary? Consider negotiating with your creditors to reduce your interest rate -- and pay off that debt as quickly as possible.
• Insurance: Review all of your insurance policies, including house, car, health, life, and disability. Smart insurance buying means having the right amount of coverage and shopping around for the lowest premiums.
• Taxes and investments: It's true that the more you earn the more income tax you'll pay -- and earning more is always a good thing (the IRS never takes 100% of your earnings). However, there may be things you can do to reduce your income tax, such as contributing to a retirement plan or switching to tax-advantaged investments. Examine your tax form from last year to see where you may be able to increase your deductions.

Sharpen Your Shopping

One of the best ways to save money on the stuff you buy is to plan ahead. When you give yourself the luxury of time, you can comparison shop to your heart's content and wait for things to go on sale. In fact, impulse shopping is what destroys most budgets: you pay top dollar for things you probably don't need and may not even want after next week.

Setting and remembering goals works for larger long-term goals,  as well as smaller purchases over the next year or two. For example, let's say you plan to buy a digital camera sometime before Christmas. You put this on your shopping list and begin to research cameras through the Internet and consumer magazines. In the case of electronics, it often pays to wait while the technology improves and the prices come down. You're in no hurry to buy, so you can wait for the very best deal to come along. Do that with many of your purchases and you'll save a lot of money. You may even find that the urge to buy something passes, saving you even more.

Andrew Tobias, author of The Only Investment Guide You'll Ever Need, offers the following suggestions for saving money:

·        Buy in bulk. Join Sam's Club or Costco and buy mouthwash, toilet paper, tuna, and everything else you use regularly in bulk. Tobias figures if you lay out $1,000 a year for $1,400 worth of stuff, that's a 40% return on your money (tax free).

·        Buy a used car. That "new-car smell" is the most expensive fragrance in the world. It could be depressing to have to buy used cars, but when you're doing it by choice to reach your own goals, that's another story. And it could save you thousands of dollars.

·        Double-check your bank. Tobias tells of a $7,000 mistake his bank made on a large real estate loan that never would have been caught if he hadn't been vigilant. Scrutinize all of your bills each month for hidden charges and additional "services" you didn't order.

·        Save energy. Tobias says simple insulation (and even simpler weather stripping) may be the best "investment" you can make, returning as much as 35% or more, tax-free, in annual savings on heating and cooling. Why put $1,000 into the stock of some utility and earn $70 in annual taxable dividends if you can put the same money into insulation and save $350 -- tax-free -- on your utility bill?

·        Prepare your own taxes. Tax software packages make it easy.

·        When booking a hotel room, bargain. "Do you have a cheaper rate?" is all you may need to say to get a 10% discount or more.

·        Quit smoking. $50 per month, invested at 10%, will be worth over $113,000 in 30 years. Also, insurance premiums and medical bills will go down.

Teach Your Kids

Children can be taught good money habits from a surprisingly early age. Around age six or seven they can begin to grasp simple mathematical concepts and learn that a dime is worth 10 pennies, and a quarter is worth more than a dime. By giving them their own money and providing spending opportunities at the toy or candy store, they learn that money, once it's spent, is gone. They learn that they can have something even bigger and better by saving their money rather than spending as it comes in. Instilling these lessons at an early age is one of the greatest favors you can do your kids.

Proper money management starts with an understanding of what money represents (a medium of exchange) and extends through to budgeting, saving, investing, and all the things we're covering in this course and more. The key to teaching children about money is to do it in an age-appropriate way that's meaningful for them. Start by giving them pocket money that they can spend on little toys or candy. As they get a little older, start shifting to them the responsibility of buying some of the items you currently pay for, such as birthday presents for friends. This teaches them the necessity of budgeting and careful shopping. When they get into high school, you can begin preparing them for the real world.

In families where money is tight and parents do not consciously teach their kids about how to manage money, children think of money only in the context of spending, never saving or investing, and they assume money is always in short supply and out of their control. After hearing "we can't afford that," or "no you can't have that," several times a week, they may learn that money doesn't grow on trees, but they fail to learn that there's something they can do to have the things they want -- namely budgeting, saving, and investing. Try to reduce the number of negative messages you deliver about money and put a positive spin on them instead, saying something like, "If we save our money, we may be able to buy that," or "Would you rather have this thing or that? The choice is yours."

The Jump$tart Coalition is working to encourage schools to add personal finance curricula to their educational offerings. In the meantime, parents can do a lot to help their children learn about financial issues. Among the guidelines offered by Jump$tart are:

·        Money management: Develop, analyze, and revise a budget; explain relationships among taxes, income, spending, and investing; perform basic financial operations; such as using checking and savings accounts.

·        Savings and investing: Compare the advantages and disadvantages of saving now and saving later; identify and evaluate the risk, return, and liquidity of various savings and investment decisions.

·        Income: Analyze how personal choices, education/training, technology, and factors affect future income; explain how personal taxes affect disposable income.

·        Spending: Compare the advantages and disadvantages of spending now and spending later; explain how payment performance determines credit history and why the records are maintained and accessed.