One of your new year’s resolutions could (and should) include saving for a goal. The goal could be paying down debt, saving for a new car, a new home or even retirement by a certain age. Once you have a goal, how do you generate cash to set aside? Unless you are planning on additional work, it comes from current income. If your income is steady and predictable, then you are one step ahead! You know your monthly income!
Now, what are your monthly expenses? Are they less than your income? One sign of expenses exceeding your income is an increase in credit card debt. If debt isn’t rising, you may have some cash remaining at month-end. This cash could be the start of saving for the goal you have in mind.
Not sure? If you are not sure if you have money left at month-end, spend some time reviewing your expenses. Start with a review of your checking and credit card accounts. Here are the popular categories to keep in mind:
- Household expenses include rent or mortgage payments, insurance, property taxes, repairs, home improvements and utility payments. Guideline: these expenses should be no more than 28% of your monthly income, with 20-25% for rent or mortgage payment.
- Transportation expenses include vehicle payments, insurance, repairs, maintenance, gas, public transportation and parking. Guideline: this category should be no more than 20 percent of your income.
- Living expenses include out-of-pocket health care costs, income taxes, food, entertainment expenses, personal items, clothing, items and activities for children, donations and tithing, vacation and recreation. Guideline: this category should only be 20 percent of your income. When considering this category, think about the many recurring expenses such as dry cleaning, salon and barber expenses, dining out (including your morning stop for coffee), drinks out with friends, movies, books and magazines.
- Payments for debts include student loans, personal loans, credit cards and overdraft protection on bank accounts. Guideline: Debt payments should be no more than 15 percent of your total income.
- Savings is the smallest area of a budget, but the most important. Saving for unexpected expenses gives us greater security and some comfort in knowing we will be OK if our work status changes or a home or car repair is needed. Guideline: At least 10 – 15 percent of your income should be saved in emergency savings, retirement accounts, and investments.
- If you have not yet started your retirement savings (into an IRA or Roth IRA or 403(b) or 401(k) or some other retirement vehicle, you may need to save a higher percentage of your income. For example, if you start saving for your retirement in your 20s, you should put away 10 to 15 percent of your gross annual income, 15 to 25 percent if you start saving in your 30s and 25 to 35 percent if you start in your early 40s.
As you review your expenses, you may notice that some categories may be taking up too much of your monthly income, based on the guidelines for each category. If you can, make adjustments of those expenses that aren’t needed. Small adjustments can allow for cash flows to other areas, including savings.
Quick tip: I recently looked at all the recurring charges on my credit card. I agreed to pay these firms on an ongoing basis, with a monthly charge to my credit card. Recurring charges pile up and may no longer be necessary! I found four charges for services I could easily live without. It took about two hours to cancel those four charges, saving me $200/month (or $2,400 per year). Now, when I look at my credit card bill, at least I know those superfluous expenses are gone.
A great way to track expenses, without the time-consuming review of bank and credit card statements, is with an app. There are a few apps for tracking expenses, but one popular one can be found at Mint. If you would like more information on various expenses trackers, check out the forbes.com review of expense trackers, done just one year ago.
Once you understand your expenses, you can make good decisions. Are you able to save for your goals? Saving may be the smallest component of your expenses, but it is the most important. Developing a plan helps you get where you want to go!