A solid budget is central to the success of any financial plan. With a solid budget, you can make timely bill payments, purchase big-ticket items, and set money aside into savings and investment products that generate additional wealth. A thorough budget begins with goal setting, which allows you to make savings projections. When it comes to saving money, you must distinguish between discretionary and committed expenses. From there, you can best coordinate an investment plan.
How to Save Money: Financial Goals
Financial goals serve as motivation for you to save money and stay the course on your budget. Common financial goals include establishing resources to provide for a first-time home purchase, college tuition payments, and ultimately, a retirement lifestyle. You will categorize each financial goal according to time frame and total costs. For example, you may need to save up $125,000 to send your son off to the University of North Carolina within the next ten years.
How to Save Money: Savings Projections
With a list of financial goals in hand, you can toggle through online financial calculator variables and make savings projections. After using the financial calculator, you can determine the amount of money you should be saving each month at a set rate of return to arrive at a future lump sum. Specialized financial calculators are available to help you coordinate mortgage, credit, retirement, and college tuition planning strategy.
How to Save Money: Discretionary Spending
You will eliminate discretionary spending from your budget altogether, if you are having trouble paying bills and your financial goals appear to be out of reach. Discretionary spending goes toward consumer goods and services that do not add value to your bottom line. Designer jeans, fine restaurant dining, concert tickets, and high-end electronics would therefore represent discretionary items. In some situations, a discretionary purchase can motivate you to save money. Perhaps you will plan to vacation in Brazil, after you have paid off all credit card debt and saved up $10,000 in cash. In most cases, you should limit discretionary spending to less than 10 percent of your gross income.
How to Save Money: Committed Expenses
Committed expenses are necessary to maintain minimum health standards, avoid loan default, and uphold the law. Rent, utilities, insurance premiums, minimum credit card payments, and taxes are therefore examples of committed expenses. For affordability, your housing and debt payments should be less than 30 and 36 percent of your gross income, respectively. For lower committed expenses, you must generally analyze the cost – benefits of a major lifestyle change. For example, you may take on $500 in moving expenses to move into a smaller apartment that saves you $300 each month in rent.
How to Save Money: Credit, Savings, and Investments
After putting together your budget, you will subtract expenses away from income to calculate free cash flow. Free cash flow describes money that is available each month for aggressively paying down debt and building savings. When paying off debt, you should make strategic payments according to interest rates. For example, you would spend an extra $1,000 to pay down a 15-percent credit card, instead of spending the money to make an extra principal payment on your 5-percent fixed-rate mortgage.
With expensive debt under control, you can next move on to establishing savings and investments. You should work to save up 6 months worth of committed expenses in cash — at all times. In terms of investments, the SEC recommends mutual funds for smaller investors. You can buy into mutual fund shares for as little as $50 each month. Each mutual fund share represents one claim above a large asset pool of dozens of different securities.
How to Save Money, Sources:
Federal Trade Commission: Knee Deep in Debt
Australian Government: Budgeting
Australian Government: Saving
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