Saving Money Over the Long Term: Managing Your Money Wisely
By: iTHINK Financial | Sep 21, 2020
The US SEC once forecasted that two-thirds of US households might be unable to achieve a major life goal. The main reason, according to the commission, would be due to a lack of financial planning.
Studies conducted by the Federal Reserve support these early predictions from the SEC. For instance, it found that as much as 40% of US households would have a hard time facing an unexpected expense of $400.
That's why saving money should become one of your top priorities. Fortunately, saving up and managing your money isn't rocket science. Nor does it mean sacrificing your happiness and well-being.
You do, however, need to make a commitment to ease up on your spending.
Ready to better control your finances to grow your savings and build an emergency fund? Keep reading then, as we've compiled some of the money-saving tips that you can start doing today!
Create an Expense List
An expense list gives you a more in-depth look at your financial situation. It allows you to determine where your finances stand and what you can do to improve it. With this, you'll have a better idea of where your money goes and how much of it you can put towards personal savings.
Start by listing down your monthly expenses, including variable and fixed costs.
Variable expenses are the things you spend on with rates or prices that keep changing. Some of these include the following:
- Utility bills (electricity, gas, water, etc.)
- Service bills (phone, data, etc.)
- Food expenditures (food at home and food away from home)
- Entertainment (going to the movies, night outs, etc.)
- Shopping (personal items, clothes, cosmetics, etc.)
Note that variable expenses can either be "discretionary spending" or "necessities." Discretionary expenses include entertainment and shopping. Necessities are those that you absolutely need, such as food items for groceries.
These are the expenses in which the amounts don't fluctuate or change. Loans like fixed-rate mortgages, student loans, and car loans fall under this category. The same goes for most insurance premiums, such as those for auto and life policies.
Many services also come with a fixed or capped rate, such as internet contracts and phone plans. Subscriptions, such as to Netflix, are also usually a fixed expense.
Map Out a Budget
Now that you have a clearer idea of your expenditures, you can start creating a budget. Doing so can help you reach your financial goals, so long as you stick to it. Also, seeing actual numbers in front of you can help motivate you to spend less and save more.
When creating your budget, keep in mind the following components.
Your Net Income or Cash "Inflows"
This is the total amount of money that comes in after costs or expenses like taxes. It also has payments for Social Security, 401(k), or co-payments for health plans deducted from it. You may know this by its other term, "take-home pay."
Using your net income (as opposed to gross income) can help you create a more accurate budget.
Just make sure to include all sources of income, such as wages and bonuses. If you have side jobs, such as part-time remote work, don't forget to add them in.
Your Cash "Outflows"
This is the money that leaves your wallet, including all the expenses you've listed above. It can also be helpful to track your daily spending, down to the penny, so you can better monitor your costs. Online financial services, like banking apps, can make this more convenient for you.
The Difference Between Your Income and Expenses
Once you have a complete list of cash inflows and outflows, check for their difference.
Subtract your total expenditures from your net income. The answer would be your discretionary income.
Learning what your discretionary income is can give you an insight as to how much you can save. From here, you can determine if it's too small or if there's enough to build a savings and an emergency fund.
The bigger your discretionary income is, the more money you can convert into savings.
Enumerate Your Financial Goals
Short term financial goals are those that you can accomplish in say, a year or less. An example would be to reduce your credit card debt to achieve a better debt-to-income ratio. Another is building an emergency fund, which you may also be able to attain within a year.
By contrast, long-term financial goals are those that take several years to fulfill. For example, you may want to aim for a certain amount to save for retirement. Another is to become completely mortgage-free by the time that you hit your early 40s.
Setting short term and long term financial goals may help make you stay motivated to save up and trim costs. Accomplishing one goal may also inspire you to continue sticking to your budget.
Determine Which Expenses You Can Trim
Most "trimmable" expenditures are those that fall under discretionary spending. That's because you have more control over these costs, such as food away from home. You may also find it easier to cut back on your entertainment costs.
Food Away From Home
You may not have noticed it, but you may be spending thousands each year on food away from home alone.
Indeed, in 2018, the average consumer spent $3,459 on just eating out. This amount represents 44% of their entire food spending that year.
While you don't have to limit your dining options, you can start saving money by preparing more meals at home. It can also be healthier this way, as you know exactly what goes into your dishes. Plus, eating nutritious food can be a way to achieve your ideal weight, which only 5% of the US population has.
So, not only does this help you save money in both the short term and long term, but it can also be great for your health. Healthier living also helps reduce your need for costly healthcare services.
Food at Home
There are at least three ways that minimizing trips to the grocery store can help you save.
First, when you buy everything you need in one go, you can reduce your transportation costs. For example, you can save on gas, and you also get to put fewer miles on your vehicle.
Second, most grocery stores offer discounts when you buy multiple items of the same kind. Be sure, however, to stick to products that you really need.
Third, cutting back on expeditions to the grocery may also help you avoid buying stuff on impulse. According to industry studies, impulse purchases cost US consumers an average of $5,400 a year.
So, imagine how much you can save even if you spend only half of that every year. You can save even more if you put your money into a high-yield savings account. Depending on the bank, your saved money may earn 20 to 25 times more than the average of a standard savings account.
In 2018, US consumers spent an average of $3,226 on entertainment alone. That's over $300 more than their entertainment spending back in 2016.
While this is no doubt integral to your well-being, some of them may be causing you to overspend. Expanded cable TV services, for instance, cost an average of almost $65 per month or a staggering $780 a year. If you don't use it that much, you may want to think of switching to cheaper alternatives like streaming.
Consider Refinancing Your Loans
When you refinance a loan, you trade an existing loan for a new one or modify the terms of the current loan. You can refinance most mortgages, vehicle loans, student loans, and personal loans. There are also refinancing options for credit card debts.
Refinancing can help you save money over the life of your loans, as it can help you get better terms. For example, an increase in your credit scores may be enough to get a lower interest rate. In this case, you can refinance your current loan so that you can take advantage of reduced rates.
A lower interest rate can then help you save money since you'll pay less toward interest payments. More of your money can then go toward paying off the principal debt itself.
Refinancing may also help you pay off your debts faster, as you can opt for a shortened repayment term. This, combined with a lower interest rate, will chip away bigger chunks from your debt every month. Since you'll pay more toward the principal loan itself, then you can reduce the time that you remain in debt.
Automate Your Savings
Let's say that you're serious about saving $500 every payday. An online banking service can automatically transfer that $500 to a savings account. You can set any amount for the electronic transfer, as well as specific dates.
The automating technology automatically deducts your savings allotment from your account.
When you automate your savings, you're committing to prioritizing your savings contributions. This can help minimize temptations, such as using the funds for discretionary purchases. It enables you to ensure that part of your earnings does end up as savings.
In addition, automating your savings helps you avoid forgetting to make contributions. You can also save time, as you don't have to make all those trips to the bank. So, in a way, it also helps you cut back on your transportation or gas expenditures.
Automate Your Bills Payments
Automatic bills payments also help lower the risks of using funds for other things. More than that, they help ensure that you don't miss a payment, which can incur unnecessary charges. In addition, they save you time since you no longer have to fall in line whenever you need to make a payment.
Remove Shopping Apps from Your Phone
Over eight in 10 smartphone users use their device to research items they want to purchase. About 60% of internet users also begin shopping with one device. They then switch to another device to make the actual purchase.
These stats show how mobile commerce and e-commerce can make it difficult to save money. If you always see shopping apps on your devices, you may feel tempted to open them and start buying.
To help curb shopping cravings, especially impulse ones, you may want to get rid of these apps. You may then consider replacing them with finance calculators for managing your money. Seeing these money-saving apps may help motivate you to reach your financial goals.
Keep Your Devices and Appliances Energy-Efficient
Energy-efficient technologies use less energy to carry out the same task. In this way, they help eliminate energy waste, and at the same time, help you lower your energy bills. Reduced bills, on the other hand, give you more chances to put more into your savings accounts.
You can start by switching to LED light bulbs, which use 75% less energy than incandescent lights. They also last 25 to 50 times longer, so you need less frequent replacements.
New filters in your air conditioner and heater also make them more energy-efficient. A fresh AC filter, for instance, can already help reduce its energy use by 5% to 15%.
A programmable thermostat can also help make your home become greener. This device automates your home heating and cooling systems.
With a programmable thermostat, you can schedule indoor temperature adjustments. It'll then make the necessary changes on its own, even if you're not at home. Since it reduces the energy use of your AC and heater, you can then save on your energy bills.
Start Saving Money Today
As you can see, there are a lot of ways to start saving money, many of which you can do as soon as today! Making lunch at home and bringing it to work, for instance, can already help you save. Calling your cable TV provider to downgrade your plan is another.
What's important is to commit yourself to save and manage your money. The earlier you do, the sooner you can build your personal, emergency, and retirement funds.
Interested in learning more about how online financial services work? Then please know that we here at iTHINK Financial are ready to help. Feel free to contact us or, better yet, consider joining us!