Yesterday, a reader that I’ll call Susie contacted me with a long story about her family’s financial situation. Here’s an excerpt from near the end that really sums up the problems that she’s having.
The real problem is that even if I buckle down and cut back on some stuff, we always find ways to spend what’s in our account and we find ourselves waiting for the next paycheck. It feels like a constant losing battle.
Susie has a lot of things right with her financial situation. She has two credit cards, but both have a zero balance on them, so they’re not facing credit card issues. Her family makes a good income as well, so they’re not really pinched by that, either. The problem is that it’s far too easy for them to spend, spend, spend.
Here are some tips that I would suggest for Susie and her family.
Set up a savings account in a separate place that isn’t easy to access. I find that online banks like ING Direct are a great place to do this, as the money in this account can be accessed if you take the time to log on and execute the transfer, but you can’t easily just write a check or use a card to drain it of money, plus you can set up sub accounts for each of your savings goals.
Go through all of your spending and trim away some of the “routine” fat. Find things that you routinely spend money on and reduce them. Good places to look include any monthly bills strictly related to social activities (like country club membership or your cell phone bill) or entertainment (like Netflix or the cable bill). Look for things you don’t use – maybe you don’t watch the premium movie channels you’re paying for, or maybe you’re not utilizing Netflix as well as you thought you would, or perhaps you’re buying way too many text messages each month and aren’t using them. If you’re unsure about whether to cut something, cut it. You can always bring it back if you find that it was more useful than you thought. Here’s a big list of ways to cut regular expenses and one hundred ways to trim a little bit of spending.
Keep a running total as you cut things down. Keep track of how much you’re saving per month. If you cut out Netflix, you might be saving $20 a month. If you remove the text messages, that might be another $10. Installing a whole bunch of CFLs instead of incandescent bulbs might save another $10, as might a programmable thermostat. The gym membership that you don’t use might save another $30. Instituting a “family night” where you cook something at home and play board games instead of eating out might save another $30 a month. These trimmings can really add up to a lot, so keep jotting them down as you do them.
Add up how much fat you trimmed. That’s how much you can immediately start socking away into that savings account. The first time I did this, I came up with almost $200 in savings each month. That seemed like a lot of money, especially from someone who had been almost drowning in his own spending.
Set up an automatic transfer from your checking account to your bank account each week for a quarter of that monthly total. So, if you figured up that you can save $200 a month, set up an automatic transfer for $50 each week into your savings account. Since you’ve already trimmed that fat, you won’t miss it, and you’ll end up saving about $2,600 a year.
Don’t touch that money until you truly need it. In other words, never touch it to buy something new. Never touch it for presents. Only touch it when you’re in a financial bind, and then hit it hard. Another option is to use that savings for a specific goal – for example, use it to save for your next car so that when you go to buy, you have an extremely large down payment already in hand, reducing the loan you’ll have to take out. Another approach is to save it up until you can singlehandedly wipe out a major debt with it, like a student loan debt or a car debt or even your mortgage, thus adding a lot of breathing room to your monthly finances.
Remember, this is just a way of getting started. I found that when I started to get ahead a little bit, I wanted to get more ahead, so I used it as a motivator to trim more and more spending. Right now, I’m able to buy everything I need and want and have plenty of breathing room at the end of the month – a goal well worth striving for.