In order to save for any goal—short, medium, or long-term—you’re going to need data. You need to know how much money you have coming in, and how much money you have going out.
Tracking Your Income
If you’re salaried, tracking your income should be straightforward. Your payslip will tell you how much you’ve earned gross, and how much you’ve received net of taxes. You’ll also be able to see if you’ve made any automatic contributions towards your retirement pot.It’s certainly possible that you’re already making some long-term savings, and you don’t even know it!
But not everyone earns the same amount of money each month. Restaurant staff rely on tips. Salespeople earn bonuses. For freelancers, no two months are ever the same. If your income is irregular, look back over the last twelve months and work out your average monthly income.
Identify Your Fixed Expenses
Once you’ve calculated your average monthly income, you can start calculate your outgoings. These will leave you in two ways.Fixed expenses are the same—or almost the same—every month. They’re your rent, your car payments, your Netflix subscription, and so on.
Make a list of each of those payments.
You might be surprised at how many fixed expenses you have. Some will be necessary. You always need to pay your mortgage or your rent. You’ll need to pay for your car and health insurance. If you’ve got student loans, you’ll have little say in whether you can cut that expense or not.
But other fixed expenses are more flexible. You might even find that you’re still paying for subscriptions for items that you no longer use—or use very rarely. Gyms, for example, rely on the assumption that people sign up at the start of the year, stop attending by about March but continue paying their subscription. According to one statistic, more than two-thirds of gym memberships remain unused. That’s almost $60 wasted every month.
And because the price of your gym membership leaves your bank account automatically, you don’t even notice it.
A subscription can be a very convenient way to pay for things you use all the time. But it can also be a very expensive way to pay multiple times for things you don’t use at all.
When you draw up your list of fixed expenses, divide them into essential expenses and “discretionary” expenses. This second category consist of fixed expenses that you could end without seriously affecting your life.
So your list of fixed expenses might look something like this:
- Rent • Gym Membership
- Health Insurance • Netflix Subscription
- Home Insurance • Audible Subscription
- Car Insurance • Xbox Game Pass Fee
- Car Payments
- Student Loan Payments
But those discretionary fixed expenses are often fairly small. It’s the essential fixed expenses that will often make the biggest difference to your outgoings but will also cause the biggest disruption to your life.
Variable Expenses
In addition to your fixed expenses, you’ll also have variable expenses—and these are harder to calculate.Each month you’ll spend a different amount on food, clothing, and entertainment. Some months are just more fun than others.
Other months, though, are more expensive than others. Vacations, for example, are expensive but they rarely happen more than once or twice a year. Friends’ weddings can mean pricey gifts. Computers grind to a halt every few years, and that winter coat you thought would last a decade might be painfully out of fashion much earlier than you thought.
That’s why to calculate variable expenses you need to look over twelve months and take an average of each type of expense. It’s going to take a while.
- Groceries
- Dining out
- Clothes
- Gifts
- Entertainment
- Travel
- Household goods
Next, pull up your credit card bill and print out each month’s list.
Using a different colored highlighter for each category of variable expenses, mark your outgoings. By the time you’ve finished, you should have marked each line in each of the last twelve credit card bills.
Count the amount you spent over the last twelve months on each category of goods and divide by twelve to produce a list of monthly averages.
Clearly, you could simply add up the total credit card bill at the end of each month, and generate an average of your total expenditures. That’s worth doing too. But you want more detail than an overall picture of your outgoings. You want to see where you’re spending the most money so that you can see where you can make the easiest savings.
If you’re spending a large amount of money on dining out, for example, then count the number of times you eat in a restaurant each month. Take the average cost of each meal, and you’ll see how much you’d save on average each month if you ate at home one extra meal each week.
Or if you see that you’re spending more than $100 a month on clothes each month because you need to dress well for work, you could consider a subscription to a service like Rent the Runway, a kind of Netflix for clothes.
It’s also easy to forget the effect of those rare but big expenses that can take a big chunk out of your bank account, like foreign travel. Those are big treats but because they don’t turn up in your credit card bill each month, they’re easy to forget. You might also dismiss them as too rare to think about. But if you take a foreign trip each year, that’s a regular expense that you need to keep in mind.
You can’t make choices about what to cut until you can see where your money is going.
Plan Your Cuts
So now you’ll know your average income. You’ll have a list of your fixed expenses and a list of your variable expenses. If your income is higher than your total outgoings, you’re already saving. You’re living within your means.But that doesn’t mean that you can’t save more. A few cuts here and there could make a big difference to your savings rate. It could allow you to enjoy better vacations, or an earlier retirement. Dropping a few variable expenses might be just what you need to buy your home sooner than you expected.
And if you’re not earning more than you’re spending then you will have no choice about making those cuts. You can’t save if you spend more than you earn.
Collect Discount Codes
One simple option is to clip coupons. That used to mean literally cutting coupons out of magazines. These days, it’s much easier. There are plenty of websites that offer easy discounts on a wide range of items. Even Amazon has an entire page offering money off products you can buy on the site.Before you make a purchase, get in the habit of searching the web to see if you can find a coupon that will let you save a few bucks.
The search might take a few minutes but it should also be fun. There’s a kick in paying less than other shoppers because you took the initiative to search for a discount.
But be cautious. When you’re looking for coupons, it can also be tempting to load up on items you don’t need because you can see they’re going cheap. Use the discount coupons to lower the cost of products you were going to buy anyway. Don’t use them to increase your spending on items you don’t really need.
Shop with a List—and After You’ve Eaten
One way to ensure that you’re not buying what you don’t need is to make sure that you always shop with a list. Take the time before you go online or head to the store to write down everything you need. There’s no shortage of apps that you can put on your phone and that will keep your list in order. They’ll also ensure that you don’t have to write the same items each week. They can even arrange your goods by category so that you can buy what you need as you’re standing in each department.Instead of pulling items off the shelf and dropping them into your basket, you’ll only choose the things you know you want. You’ll be less at the mercy of the marketing messages on frozen pizza and chocolate bars, and you’ll find it much easier to keep to your budget.
It’s also a good idea to buy your groceries after you’ve eaten—and not just because you might buy more food. You could end up buying more of everything.
It’s not entirely clear that shopping while hungry does inspire people to load up on more food. One study that found that hungry grocery shoppers buy high-calorie foods has been retracted. But it sounds reasonable. It’s certainly going to feel harder to resist those chocolate impulse buys next to the cash desk if your stomach is rumbling.
But other studies have found that shopping while hungry does make people buy more non-food items. In one study, researchers asked 81 customers leaving a large department store to complete a survey. The survey included a question that asked participants how hungry they were. They also scanned the receipts of their purchases.
The study found that the hungry shoppers spent 64 percent more than the less hungry shoppers. They had also bought more non-food items.
Unsubscribe from Marketing Emails
You can do it without even thinking. You reach a website and a pop-up blocks the page and asks for your email address. It might even offer you something in return: a free e-book, for example, or perhaps a discount on your next purchase.All you have to do is agree to receive the company’s newsletters occasionally in your inbox.
You like the company and you want to hear from them, so you sign up. If their communications become too annoying, you think, you can always unsubscribe.
The result is that you open yourself up to a steady stream of marketing messages. And those messages work. According to one reported study, email marketing is up to 40 times more effective than social media marketing and works three times as fast. You’re getting targeted ads delivered right to your inbox.
Smart email marketers also track how you react to those emails. If you read the email or click a link, even if you don’t buy, they’ll send you more messages that you do like. There’s a good chance that eventually, you’ll buy something you really don’t need.
The more email subscriptions you collect, the greater the likelihood that you’ll spend outside your budget.
Take the time to look through all of your email newsletter subscriptions. Recognize that those emails aren’t just there to inform you. They’re there to sell to you. They’re advertising tools targeted at your preferences designed to persuade you to buy. Unsubscribe from all the lists you aren’t genuinely interested in reading.
Know Exactly How Much You’re Paying
Retailers have a host of different tricks to make it easier for people to buy. Many of those tricks involve hiding the price of their goods.That doesn’t mean that they don’t put a price on them. They just make the price look deceptively low and easy to pay. An Apple iPhone 12 Pro, for example, costs from $999 in an Apple Store. That’s a lot of money for a phone. It’s the kind of payment that leaves a big hole in your savings and hurts to hand over.
Buy the same phone from AT&T, however, and you can pay just $30.56 a month. That’s much more affordable. It’s less than you’d spend on a night out with friends for the latest top-end smartphone. It feels like an affordable way to use something you otherwise wouldn’t be able to afford. Over 36 months, though, you’ll have paid $1,100—a hundred bucks more than if you had shelled out a single payment. And you’ll have to add tax to those payments too.
Sometimes, pricing can be lower than it appears. The sticker price of a 2021 Ford Explorer, for example, starts at $32,925. That’s an eye-watering amount of money that few people can afford to pay out of pocket. But auto dealers recognize that they won’t sell many cars if they expect buyers to write a check for the full amount before they hand over the key. They offer a host of different financing options.
The sticker price allows buyers to compare the final price of different makes and models. But it says nothing about the actual cost of owning—or using—the car.
To calculate that cost, you’ll need to know the size of the down payment you have to make, the amount you have to pay each month (including interest payments), and the duration of the loan.
So imagine you’re buying a new car with a sticker price of $35,000. You have to make a down payment of $5,000 and monthly payments of $350 for 36 months.
A deal like that feels as though you’re only paying $350 a month to drive the car. But that excludes the down payment. In fact, at the end of the three years, you’ll have paid $12,600 plus the initial $5,000. That makes a total of $17,600. The monthly payment, including the down payment, will have been $489.
But as you come to decide whether you want to buy the rest of the car or trade it in, remember that you’ve actually paid less than $489 a month. You’ll have paid about half the price of the car but the car is likely to have retained about 80 percent of its value. Sell the car and you’ll receive 80 percent of $35,000—or $28,000. You’ll need to pay the seller the remaining half of the car’s initial price, or $17,400. That gives you another $10,600.
In addition to paying for the use of the car you’ll also have put money into it that you can later take out. Using that car for three years will actually have cost you $7,600, or just $211 a month.
The aim of leasing is to ensure that buyers pay little more than the depreciation cost of the vehicle.
Whenever you’re buying something with a long-term loan or on a lease basis, it’s worth calculating exactly how much you’re paying each month to use the item. You might find that you’re paying much more than you think, and that there are cheaper ways to get the same service.
And sometimes, you can find that the service is more affordable than you thought.
Counting Your Costs
Most of the money you spend each month will be clear and easy to calculate. Your gym membership and cable fees rarely change. Rent should be the same from month to month.Other expenditures change more often. Energy expenses rise and fall with the seasons: you might ramp up the air conditioning in summer, drop it in fall, then turn on the heating in winter.
And some costs change from week to week. Some periods are just more entertaining—and more expensive—than others.
What you cut will depend on you, and on your priorities. You’ll have to choose whether you should cut back on eating out or cancel your gym membership. Or even move to a small apartment to save on rental costs.
Remove Your Debt
As you count your costs, you might find that you’re surprised by how much you’re spending. Small expenses made often quickly build up.But there’s one expense that’s hard to see and is likely to be your biggest financial drag: credit card debt.
Credit cards are invaluable. They’re vital ways to pay for almost anything you want to buy online. They ensure that you don’t have to carry around cash everywhere. They can give you points that you can trade for discounts and even flights and hotel stays. And they give you credit. They let you buy now and pay when you can.
That credit, though, is expensive. Interest rates typically start at around 15 percent each year. Run up $1,000 on your credit card, and roll over that debt for a year, and you’ll have added at least $150 to your debt.
That $150 then runs up its own debt so that the amount you owe can very quickly run out of control. The average American family owes $6,270 in credit card debt. That means that the average American family is liable for at least $940 in annual expenses to credit card companies.
The first thing you should do when you’re looking to save money is to pay off your credit debt. Remove those large interest liabilities. Stop paying credit card companies their giant sums for the privilege of using their money.
Once you’ve paid off that debt, you should get into the habit of paying the balance off entirely every month. Borrowing from credit card companies is one of the most expensive ways to obtain credit.
That doesn’t mean you should never borrow money. Businesses borrow to invest; they use money from the bank to make more money in the future that covers both the debt and its interest. Store credit can help you to enjoy a purchase now instead of when you can afford it in the future.
But always check the annual premium rates, or APR, so that you know exactly how much you’re paying. Check to make sure that you can’t borrow the same amount more cheaply elsewhere.
And be certain that you can’t wait to buy the product now, instead of waiting until you’ve saved enough to pay in cash.
