1. Figure out How Much Money You Need to Live Each Month
Start by calculating your personal cost of living. To do so, you’ll need to add up your fixed, variable, and discretionary expenses.Fixed Expenses
Fixed expenses are necessary costs that don’t change from month to month. Common examples of fixed expenses are:- Rent or mortgage
- Car payments
- Phone/cable bills
- Insurance premiums
- Property taxes
- Student loans or other debt payments
Variable Expenses
Variable expenses are also necessary, but their amounts can vary from month to month. These include such expenses as:- Groceries
- Utility bills
- Gas
- Clothing
- Credit card bills
Discretionary Expenses
Finally, you’ll need to account for discretionary expenses. These are the purchases you choose to make, such as:- Meals/coffee out
- Entertainment
- Streaming subscriptions
- Hobbies and sports
- Gym memberships
2. Create a Budget That Allocates Money for Necessary Expenses, Savings, and Discretionary Spending
Once you determine the amount of money you need each month, you can create a budget that meets these needs while leaving room for savings.Start by allocating money toward your fixed costs. Since these expenses remain constant, they make it easier to plan your overall budget. Next, divert money toward your variable and discretionary expenses.
Remember that you’re not trying to allocate your total monthly income but only enough to cover what you’ll need from each category. This will ensure you have enough left over to put toward your savings.
If you’ve adequately budgeted, you should have enough remaining money to build your savings. Start by ensuring that you have a short-term savings account. Having enough money on hand to cover three to six months of expenses can prevent you from tapping into your long-term savings if an emergency arises.
3. Make Adjustments as Needed to Ensure You’re on Track to Meet Your Goals
To learn how to plan for saving money, you’ll need to prepare yourself for something of a reality check. First, compare the budget you’ve created to how much you’ve actually been spending each month. It could be that your current spending habits are not in line with your financial goals.- Cut back on gourmet coffee or dining out
- Eliminate one or more streaming services
- Cancel unused subscription services
- Buy store-brand products
- Use coupons to purchase groceries
- Adjust your thermostat to lower utility bills
4. Automate Your Finances, So You’re Not Tempted to Spend More Than You Have Allocated
Knowing how to plan for saving money is the easy part. The hard part is sticking to your budget. But you can make it easier by automating your finances.Many consumers already rely on automated bill payments to cover recurring expenses. But some banks let you take this a step further by automatically transferring money between your checking and savings accounts.
For example, you could set up an automated transfer that ensures you set aside money for monthly savings. This means you won’t be tempted to spend before you have a chance to save.
Just be careful with automated payments. It’s easy to lose track of which companies can access your payment details. It’s too easy to sign up for automated services only to have the company raise the price later. This can derail your budget and even cause an overdraft if you’re not careful.
5. Make a Plan to Pay Off Any High-Interest Debt
While most of the adjustments you make to your budget will focus on variable costs and discretionary purchases, you can also cut back on certain fixed expenses.The Snowball Method
Start by paying off your smallest debt first. Then, once you eliminate this debt, apply the amount you were paying to your next-highest debt. The goal is to allow your payments to “snowball” until you’ve eliminated all smaller debt and you can now afford to make more significant progress on your larger debt elimination.The Avalanche Method
The avalanche method works in reverse. Start by paying off your largest bills (or loans with the highest interest rates), then work your way down to your smaller bills. This will help you cut out your largest bills as quickly as possible. Just be aware that since some debts can be pretty high (student loans, for example), eliminating these expenses may take a while.Caution: Watch out for Prepayment Fees
While eliminating credit card debt is a wise choice, not all of your debts can be paid off so easily. For example, some mortgages and car loans have prepayment penalties that will charge you money if you attempt to pay off your debt too early. So check to ensure that paying off your debts won’t result in added charges. Discipline your spending, buy only what you need, and avoid impulse buys.Keep a tight rein on your wallet. It’s easy to get carried away and buy more than what you need. So instead, stick to the essentials, and avoid impulse purchases that can derail your budget.
Stick to a Grocery List
Before you go grocery shopping, make a list of your essentials. This prevents you from making snap decisions or being influenced by store displays once you’re there. Eat before you go to the grocery store so that you aren’t hungry—hunger can overcome your good senses.Give Yourself Time to Think About It
Impulse decisions happen quickly. Discipline yourself to think about your spending before making the purchase. When shopping, put the item down and return to it before you leave. Or leave the item in your online shopping cart until you can determine how it fits your budget.Pay for Discretionary Purchases in Cash
Pay for your significant bills using automated bill pay, but complete your discretionary purchases with cash. That way, you will always have a limited amount of money to draw from and can make buying decisions accordingly.6. Celebrate Small Victories Along the Way as You Work Toward Your Financial Goals
Your retirement years are basically a lifetime away. That’s why it helps to set solid benchmarks to track your progress.For example, you might make it a goal to set aside 15 percent of your monthly income toward your retirement goal. Or you could make it a goal to set aside a year’s salary for your retirement by your 30th birthday.
Setting a series of short-term goals can help you track your progress toward retirement and give you a sense of accomplishment along the way.
7. Review Your Budget Regularly to Make Sure It Still Meets Your Needs
Your financial circumstances change all the time. Your budget should do the same. Make a plan to review your budget at least once per year. This can help you make adjustments as you pay off debts or have more revenue to draw from.Reviewing your budget is especially important during periods of inflation. For example, higher prices at the grocery store and the gas pump may prompt you to adjust your variable expenses. In addition, you may need to reevaluate your regular expenses to ensure you’re still able to allocate money to your savings.
8. Changing Your Approach to Retirement
Now that you know how to plan for saving money each month, it’s time to put your knowledge into action. Due can help. At Due, we believe in helping our customers strategize and reach their retirement goals. We also offer an annuity that can provide a stable income during retirement.By John Boitnott
