New job or promotion, higher salary, and a new perspective on life going forward. I’m making so much more money, I’m finally going to start saving! The first few paycheck come in and you find yourself spending the entire check, you chalk it off to catching up on old bills and finally being able to afford whatever it was you have always wanted. A few months into the new job, you look at your savings and you’re still in the same spot before you started, you’re making so much more money but the same problem of being able to save persists. How is it you can live within your means before, and make so much more now, and still feel like you’re again living within your means? The answer is simple, you don’t understand your spending habits.
Why is it important to save money? Well, there are several answers to that, and the most important for the present day is for life’s unexpected situations. Maybe your car broke down, you have unexpected medical bills, you got invited to a vacation last minute, someone close to you is in a jam, or you ended up getting fired. Life is unpredictable, so it’s important to be prepared for life’s short term problems or unforeseen disasters. You may have a dream of buying a big-ticket item like a house or car. Most importantly, we save because there is going to come a time your body won’t let you work anymore, or you’re just too tired of the cycle after 40 some odd years. We save so we can enjoy the twilight of our lives. The cold hard truth is, you don’t want to be 75 years old and relying on social security or your kids. Save and invest for your future, it arrives faster than you think. To put it into perspective, take a quick moment to reflect on how fast the last some odd years of your life have come and gone.
How do I save money? The first thing you should do is an analysis of your spending habits. You’re never going to save money if you don’t fully understand where all of your money has been going. Assuming everyone has a checking account, and if you don’t, I recommend you get one, retrieve your bank statements online for the last 2-3 years. Nowadays, every bank allows you the choice of exporting your statements into a word or excel format. Don’t worry you don’t have to be a wiz at excel just understand the simple tools. Once you have everything in excel, you will need to go transaction by transaction and categorize what it is you spend your funds on. Don’t create 50 categories, keep it simple. When I first did this for myself I had the following; Income (all incoming cash), rent, insurance, phone, cable, electric, Social (times you go out with friends or family), dining out (delivery), groceries, credit cards, student loans, health (vitamins and gym membership), Pet care (any pet expenses), and miscellaneous. Once everything is categorized remove excess information, all you really need is the amounts, date, description and categories you created.
At this point, you should have a clean list of dates, transaction descriptions, amounts, and categories. For the sake of being lengthy, I will not go into an excel beginner’s tutorial so you will need to play around and figure out how to do the following step yourself or you can always contact me directly. Filter out income and leave only expenses, highlight the expenses and multiply by negative one dollar (this way all your income numbers are positive and all expenses are negative, making it easier to add and subtract). Go to Insert on the excel ribbon and hit create pivot, drag date to the insert column box, categories to the row box, and amounts to the values box. Pivots will allow you to filter dates by a transaction, week, month, quarter, or even year (start with the year filter first). You now have a clean look at all your spending for the last few years. At the end of the pivot, there is a totals column, and there is where you will start. Look at the different categories and see where you spent the most. You now can utilize the spreadsheet to see where the extra money you’re making every year is going.
When I first did this, I found I was spending an absurd amount of money on social events and dining out. What I realized from my spreadsheet was that as I was making more money, I was ordering more delivery and socializing out more often. Now that I was more conscious of the habits that disrupted my ability to save, I created a set of rules to keep me honest.
First and foremost, don’t have your checking and savings accounts connected. It’s so easy to move money around nowadays. In my opinion, it is best to make it as difficult as possible for yourself to make a transfer. My savings is at a small hometown bank and I purposely did not enroll in their online banking. Have two separate checking accounts, one for your fixed expenses such as rent and utilities, and another for social events and dining out. Finally, you should talk to a financial adviser regarding retirement. Get the help you need to invest correctly, so you are where you need to be when you retire.
The rule of thumb is 20% toward saving (10-15% retirement), 50% necessities such as utilities and rent, and 30% everything else. The percentages will vary at times, example if you’re saving for a down payment on a house, you might decrease your retirement to 10% and discretionary to 25% and increase savings to 10%.
Don’t allow money to be the number one cause of why you don’t enjoy life, prepare yourself for those difficult financial moments, that unexpected bill, or when you want to make a large purchase. The number one cause of stress in America is money, and a lot of times it’s because people don’t understand their spending habits. Take the time, do the work, and allow yourself to live stress-free.