Budgeting and Saving Money

person working out a budget and money saving

Most people work and spend money, rarely keeping track of what they are buying. They live from week to week on their paychecks, wishing they could save some, but finding that at the end of each month, every nickel is gone – and then some.

Years later, they wake up and find that retirement age is not so far away, but they don’t have enough money to stop working. Or an emergency arises and they don’t have enough to pay for it.

What most of us are doing wrong is this: we fail to set up a budget. The key to financial security and independence is something so simple that we never bother to look at it. The key is setting goals, creating a budget, and sticking to it.

pink pig sat on a stack of coins

This has become an especially difficult problem in an economy where jobs are scarce. Many industries have let thousands of workers go, after decades of working in trades and professions that have been outsourced to Asia. In Detroit where the auto industry has collapsed, workers are idle, streets are desolate, stores are empty, and houses are in disrepair. All over the U.S., millions of men and women are out of work and don’t know how they are going to pay for food and shelter.

When people are earning a living, they tend to buy things without thinking much about what they get. Not too many people keep an inventory of what they spent money on this week.

There goes £5 for the Caramel Macchiato, £50 for dinner at a chain restaurant, £90 for their mobile phone bill…endless purchases. Some purchases are necessary; others are self-indulgent.

In the book The Millionaire Next Door, Dr. Thomas J. Stanley writes about how ordinary people accumulate wealth. It’s not about luck or inheritance. It’s about hard work, diligent savings, and living below one’s means. It’s about keeping a budget and putting away money that will grow and make you rich over time. Saving a small amount of money on a regular basis makes a big difference.

Here is an example of the Time Value of Money, based on a 10% return. If a person starts to save £3,000 per year at age 28, he will have more than £750,000 when he is 65 years old.

Now, it’s not so easy to save £3,000 a year, every year for nearly 40 years. That’s because something is always coming up, meaning there are always unexpected costs. Your tooth can get cracked and you need a crown. You get in a car accident, you get divorced, you need a new house, you want to go on a trip, you spend too much eating out, or your child is a genius and he gets into M.I.T., but no scholarship. The list of expenses is endless.

No excuses, however. You must develop a budget to get what you want. Here’s what to do:

Create a budget based on income you expect to receive each month. Determine your net income, after taxes, insurance deductions, and retirement plans. Write down all your sources of income. Besides a paycheck, maybe you get child support or alimony, dividend checks, or second job income. Determine your fixed expenses.

Your house or rent payment is a fixed expense. Determine flexible expenses, which will vary from month to month. These would include food, clothing, entertainment, and hair care. Estimate periodic expenses, which occur every three to four months. These expenses are things like license plate renewal or car maintenance. Begin to write up a budget list.

The first item on the budget should be savings, no matter how small that amount is. Pay yourself first. You’ve probably heard this adage before, but this time, take it seriously. Create an Excel sheet or just an ordinary chart estimating what you plan to spend for each expense. For example, budget for hair care, clothing, and food. Fill in an amount for every fixed expense. Try not to exceed the amount.

Creating a budget is based on personal values and goals. Recently, I overheard a woman telling another woman about a friend. She said, “My friends wanted to buy a house, so they ate macaroni and cheese or beans and hot dogs, every night for a year until they saved enough money for a down payment.”

This may sound extreme, but it’s not. If you buy coffee every morning from one of the well-known coffee spots, you will spend about £15 a week, adding up to about £780 a year. If your restaurant bills add up to £100 per week, the total for the year will be £5,200. You can already see that a small down payment on a house or an apartment is possible.

Personally speaking, I used to live in Manhattan and spent about £7,500 per year on clothes. Most of it was on credit cards. If I had saved half of that money, including the interest on the credit cards, I could have saved about £45,000 over 10 years.

Instead, I have a lot of old clothes in my closet. So you see where this is going. Americans spend too much money on things they do not need. It is time to take stock of your values and goals. It is time to get realistic about accumulating money.

Start tracking your expenses. Keep a notebook and write down every little thing that you buy. Start putting some money into a savings account or a conservative mutual fund. Set up an automatic withdrawal so that each month a mutual fund company takes £50 or £100 out of your checking account.

There are compelling reasons why you must set goals, develop a budget, and live within your monthly income. The money you do not spend on small items and coffee can earn interest. Over time, interest compounds. Small amounts of money can grow as it earns a return on investment.

It is never too late to set up a budget and save money. Budgeting is the key to financial stability. It’s time to forgo instant gratification for the sake of your future.

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Are you looking to work on your budgeting and money-saving, then this is a post to read to help you make the next step on your journey.

1 comment / Add your comment below

  1. I think sometimes you have to sit down & take a look at where your money is all going.My eldest daughter for instance had Sky & all these extra channels like Sport for instance & nobody watch’s it. She found she had a better deal from somewhere else ( best not say as advertising) which offered everything she needed. I think we all get in a rut just plod along them realise why am I still have Direct Debit for this ?

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