The first step in saving money for future is to create a monthly budget and start living below your means. Its not what you make, but its what you save will help in creating a healthy budget - one that provides for needed expenditures, discretionary pleasures, savings for big ticket items, and savings for long term retirement planning.
There are several spreadsheets available on the internet for creating a budget, and what I discuss below is just another way of looking at creating a budget without any sophisticated tools. One can start with a pen & paper to list them, and then use a spreadsheet for monthly calculations.
Lets first lot down the list of regular and flexible expenses that we all have. This could be either for a typical individual or a family and usually is something as follows:
Regular expenses
- Rent/mortgage
- Car payments and insurance
- Daycare
- Out-of-pocket insurance payments (life, health, rental, etc.)
Flexible Expenses
- Groceries,
- Utilities - gas, electricity, oil
- Phone, Cable, Internet
- Eating out
- Clothes
- Entertainent
- Personal Expenses (salon, etc)
Lets now assume a hypothetical individual living in Massachusetts, and earning a yearly salary of $55,000. After tax (federal and state) , 401K (6%) contribution and medical insurance deduction, the net biweekly pay would be $1545 using the net pay calculator (from
here)
Note that I have assumed a 6% pretax 401K contribution for retirement savings in the calculation above. Some employers do match to certain % and others don't. If your employer matches contribution upto 6% (for example) of salary, then I would highly encourage you to contribute to 401K to get this free money.
With a monthly net pay of $3090, you can create a budget in a spreadsheet with all the fixed/flexible expenses as seen below. Based on the this simple example budget, you can
save ~40% of the next pay i.e,
$1280 per month (excluding 401K).
| |
Monthly Budget |
| INCOME (post tax) |
|
| Biweekly pay check |
$1,545.00 |
| Monthly pay |
$3,090.00 |
| FIXED EXPENSES |
|
| Rent |
$750.00 |
| Car Payment |
$100.00 |
| Car Insurance |
$90.00 |
| |
|
| FLEXIBLE EXPENSES |
|
| Groceries/Food |
$300.00 |
| Utilities |
$60.00 |
| Cell Phone |
$50 |
| Netflix |
$10 |
| Gasoline |
$150.00 |
| Miscellaneous |
$300 |
| Total |
$1,810.00 |
| |
|
| Savings |
$1,280.00 |
| Pretax 401k (6%) |
$138 |
| Total Savings |
$1,418.00 |
I understand this is just a simple example with minimal categories, and the actual savings will vary based on your lifestyle. I have also left out the student loans. Just going through this exercise every month and by getting money out of the checking account into savings first, you can start the journey towards building wealth.
One can start with a goal of 15% savings rate and then progressively increase the savings rate. ed
How much do you save? What approach do you follow in minimizing expenses?
