Budget Basics
Dash of savings, slice of spending improves budget pie
By Dave Burge / El Paso Times
May 3, 2007
If you want to save more money or get out of debt, the simplest solution is to spend less than you make, experts say. "That's always the prescription," said Mike Sullivan, who is the director of education for Take Charge America, a national nonprofit credit-counseling and debt-management company in Phoenix.
Of course, you can get a part-time job, sell unneeded possessions or hope for a raise from your boss. But budgeting, watching how you spend your money and creating a savings plan are key ways to get your finances in order, experts say. Greg McBride, a senior financial analyst with Bankrate.com, says, "A lot of people wrinkle their nose at getting a second job or running a side business from their home. "Unless you're willing to do that, you're looking at cutting expenses to create additional money that can be applied to debt or savings," McBride said.
Westsider Patricia Gonzalez said she created a financial plan about a year and a half ago to save more money, build an emergency fund and pay off her credit-card debt. That plan includes having a portion of her paycheck deposited directly into a savings account. "It's just a matter of putting pen to paper, seeing where you spend your money, creating a budget and sticking to it," she said. Gonzalez said she used a self-help book, "The Budget Kit" by Judy Lawrence, as a guide in creating a budget.
Where's it going? The first step, experts say, is figuring out how much money you're spending each month and where you're spending it, Sullivan said.
Also, put your savings on autopilot, experts say. To do that, have a portion of your paycheck deposited directly into some sort of savings or investment account. "That way, it's is out of sight and out of mind," said Howard Dvorkin, founder of nonprofit Consolidated Credit Counseling Services Inc., a national organization based in Florida.
Clearly, Americans need to save more, experts say. According to the U.S. Commerce Department, the U.S. household savings rate has been negative for about two years. Also, Americans have accumulated $880 billion of credit-card debt, according to the Federal Reserve.
To save more money or pay off your debts, you need to make a conscious decision and stick to it, Dvorkin said. Because Social Security faces an uncertain future, it's more imperative than ever to start saving, he added. "You need to start early and get used to it," said Dvorkin, author of "Credit Hell -- How to Dig Out of Debt."
Savings tips
Some tips for boosting your savings or getting out of debt, all while earning the same amount of money:
Track your expenditures for an entire month, Sullivan said. Use a small notebook or a stack of index cards.
Write down everything you spend money on, whether you pay cash or use a debit card or credit card.
The idea is to see how much money you spend and compare that to your take-home pay.
This exercise can help you identify areas you can trim. You can then take the resulting savings and apply it to either your savings or for paying off debt.
After you've tracked your spending habits, create a budget and hold yourself accountable, McBride said.
"Unless you track your monthly expenses against your take-home pay, you'll likely have no idea whether you're living within your means," McBride said.
Dvorkin said he can cut 15 percent out of most people's budgets "without them even feeling the difference."
"Most people have a lot of waste in their budgets," he said. "Go ahead and get cable, but do you really need 300 channels? Do you really need that $4 cup of coffee on the way into work? It may not sound like much, but it adds up."
Sullivan said that many people focus on small expenditures.
But also take a look at what you pay in rent or on your mortgage each month and how much you pay for your car, he said.
Sullivan recommends that you spend no more than 30 to 32 percent of your take-home pay on housing and an additional 15 to 17 percent on transportation.
Some expenses are easy to trim, such as that gym membership you never use, Sullivan said.
Pay yourself first. This is a key principle in building savings, experts say.
You can use direct deposit or automatic transfers from your checking account to put your savings plan on automatic.
"Don't wait until the end of the month and try to save what's left over," McBride said. "You won't be able to save."
Create an emergency fund equal to three to six months' worth of expenses.
The idea is to have a rainy-day fund that you can dip into when you get an unexpected expense and avoid having to rely on your credit card for life's little emergencies.
"People I see who run into financial difficulty almost always have two things in common: They don't budget and they lack an emergency savings fund," McBride said.
If your employer offers a retirement plan, such as a 401(k), make sure you participate, Dvorkin said.
Contributions are made in pretax money, so participating can lower your taxable income, experts say. Also, many employers offer some form of match, which amounts to free money. "If you contribute $100 and your employer offers a 50 percent match, that $100 is really $150," Dvorkin said.
A Roth version of the 401(k) has been available since 2006, but it hasn't been widely adopted yet.
Where to get help
www.bankrate.com. The site contains a free budgeting calculator, a list of high-yield savings accounts and a monthly financial literacy package that deals with topics such as budgeting, getting out of debt and boosting your savings.
www.consolidatedcredit.org. The site's Learning Center has free downloadable brochures on budgeting and how to save money when you shop, among other topics.
www.takechargeamerica.org. The site has free articles, a financial tool kit that includes quizzes and the Budget Doctor feature where you can ask questions over the Internet.
www.valueyourmoney.org. The site, run by the Texas Society of Certified Public Accountants, has information on savings, budgeting and other financial topics, broken down by life stage.
