Saving money is vital, and a savings account allocation should be part of every budget. Most financial experts recommend saving between 10 to 20 percent of your gross salary. Experts like Dave Ramsey, for example, tell fans to “pay themselves first,” meaning you should take 10 to 20 percent out of each check and allocate those funds directly to your savings and investments. However, if you haven’t been successful at paycheck budgeting, another effective way to live on less is to subtract 20 percent off the top of your annual income, drafting your budget backwards and making a plan to live on 80 percent of your pay.
If you are going to succeed at living on less, you need to draft three budgets: a yearly budget, a monthly budget and a weekly or bi-weekly budget, depending on how you are paid. Use the annual and monthly budgets as an overview of your income versus expenses and your weekly budget to drill down and manage your everyday necessities. From here, it’s time to start trimming some of the fluff out of your expenses.
Subtract 20 percent from your annual and monthly income and pretend like that 20 percent doesn’t exist, for now. For example, if you earn $4,000 a month ($48,000 a year) deduct 20 percent from that amount, leaving you with $3,200 a month. Then, see if $3,200 will cover your expenses. If not, you need to do some cutting.
Sacrificing that Prada handbag or a new pair of shoes every two weeks pales compared to saving for your future. Sacrifice now and benefit later. Look at the things you spend money on that you do not genuinely need. For example, dining out is a budget buster for most people; cutting back means saving. Or, consider dropping that $5 a day coffee habit and watch your disposable income increase. The best way to reduce the fluff from your budget is to start trimming variable expenses like dining out, entertainment, clothing and groceries. Repeat this exercise until you can live comfortably on $3,200 a month –or whatever your 20 percent less number is.
Saving money sounds fantastic, but it is much more effective if you create goals for your savings. For example, put 10 percent of your savings into a high-yield savings account and then put the other 10 into investments, splitting them up between IRA accounts and stocks or bonds. Use automatic payday deductions to reduce the temptation to spend your “invisible” 20 percent.
From here, make a savings goal for your first 10 percent allocation. For example, take a vacation when you reach $2,000 in that fund. Then, when you achieve your savings goal, bask in the sun, and enjoy the fruits of your labor. When you start enjoying your savings, you’ll stop feeling compelled to spend unnecessarily.
Budgeting backwards is an effective way to cut costs and live on less, helping you save more and build wealth. It’s easy to live on less, when you know how to budget for it.