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Budget to Save
The new year is upon us, the season of resolutions. You may promise to eat less, to exercise more, to answer all your email. One of the most important resolutions you can make, though, is to draw up a budget that includes saving – and then stick to it.
Of course, this means you have to draw up a budget. Start by writing down everything you spend for at least a month. Include every penny, from your mortgage payment to the quarter you put in the parking meter.
Then sit down with that list, as well as with your checkbook, and get a picture of your spending. In particular, look at:
Reviewing these expenses should give you an idea of what you spend every month. The next step, of course, is to see where you could cut back. Include your spouse and your older children in this discussion, which should include a hard look at virtually everything.
- Fixed expenses. These are expenses that remain the same from month to month, such as your rent or mortgage, car payment, college loan repayment, insurance (if you pay monthly), day care, cable TV, etc. You might be able to eliminate some of these expenses – give up cable or sell your car – but you cannot reduce them (without refinancing the loans).
- Flexible expenses. These are bills you pay every month, but the amount varies. In this category are items like utilities, phone, gas and food. You need these things, but you can have at least some control over how much you spend on them.
- Discretionary spending. This also varies from month to month, and it includes such things as eating out, entertainment, clothes and charitable giving.
- Major expenses. These are big expenses that come infrequently, such as vacation, holiday gift-giving, college costs, home or car repairs. You need to save for these expenses every month, because you probably cannot afford to pay them out of pocket when they are due.
Can you reduce your fixed expenses by, for example, refinancing your house or selling your car and buying a less expensive one? Can you cut variable expenses by changing your phone plan, shopping at a different supermarket or taking public transportation to work? Can you cut back on buying clothes or eating out? Do you spend too much on holiday gifts or travel?
The goal of this exercise is to find room in your budget for one more item: saving. Determine how much you think you can save every month, and then see if you can’t squeeze out a little more.
And what should you do with this saving? It depends on your goal. If you are saving for retirement, make maximum use of any tax-advantaged savings opportunities available to you, such as a 401(k) account or IRA. If you are saving for college, consider a 529 college savings plan, which also offers tax advantages. And if you are saving for shorter-term goals, look for vehicles that will help you get a good return over the period you will hold your money.
Your financial adviser can help you evaluate where to put your new savings. The important thing, though, is to make saving a regular part of your budget. You will be much better prepared for whatever the future holds.