Last week we explored the concept of saving 10% of your income, hopefully you have begun putting those strategies in place. You may have found it is a lot harder than it sounds!
Don’t worry help is here – Spending less than you earn is the answer!
Sounds ridiculous and too simple; but with the easy availability of credit cards and short term loans, spending more than you earn is all too easy and common.
Many people believe living within your means is not possible, but not doing it is going to be disastrous for your finances, and it will have an adverse effect on the rest of your life. If not now, then in a few months or a year.
Day to day you may not feel the effects of paying interest, but it is building up in the background. Each day you are paying a little bit more for that credit card splurge. If the credit monster isn’t is your problem, it might just be that you never feel like you have any money and you aren’t getting ahead.
You can’t rely on earning more in the future to cover today’s expenses, it is important to be more forward thinking. Millennials are expecting to retire earlier than their parents, and are likely to live longer, meaning they will actually be in retirement for more years than they are at work. So we have to put something away for the future or save for that seemingly elusive home, these things don’t fall in to your lap unless you take decisive action.
The ONLY way to do that is Spend Less Than You Earn. Don’t dismiss this step, it is a good checking point for even the best of savers, an opportunity to make sure you really are getting ahead.
How can you tell if you are spending less than you earn? How can you make room for saving 10% of your income?
A simple budget is your friend!
- Work out your essential expenses using a budget template – these are the basics of what you actually need to live; food, rent/mortgage, utilities etc.
- Work out your discretionary expenses (extra things you like to spend money on). Think dining out, going to concerts, wine, movies, clothing etc.
(Don’t get point 1 and 2 two confused, buying clothing is generally more of a want than a need) - Go back to the top of your budget and put in what is coming in – all income sources.
- Enter in your 10% savings target at the bottom.
- Now a simple calculation: income – minus expenses (needs + wants) – 10%.
e.g. net income of $50,000 – ($30,000 + $10,000) – $5,000 = $5,000
The figure you come out with will either be a positive or a negative. If it is positive you have a surplus and can save extra for something special, a holiday, a house or add it to your 10%.
In the above equation I have $5,000 surplus.
If it is negative, you have a deficit and you have two choices to rectify it:
- Cut your expenses – start slashing your discretionary spend (your wants); it doesn’t have to be the whole amount just reduce each item by small amounts to get you back into the black.
- Find a way to earn more income; a second job; part time or casual could be the answer, although earning more can be more difficult than simply cutting your expenses.
Once you have a good budget, you can apply many variations to your savings structure, but it is near impossible to do this without knowing where you are at now and what you have to play with.
Get going on your budget and feel the power of having control of your finances, be proud of spending less than you earn. Your bank balance will start to grow and you will be inching closer to your goals!