How to Budget Your Money and Save 20%

Audit your household budget and determine if you are living within your means. Reducing your expenses by 20% is very realistic if you stop procrastinating.

It's no wonder that we really don't have a clear understanding of what it takes to budget our households. Our employers have us thinking in terms of a gross annual salary and net bi-monthly or every other week paychecks. Creditors have us paying them monthly. Retirement accounts have us thinking in terms of pre-tax dollars.

Are you spending too much?
Whether you have desires of owning your own company or working for an employer, it is helpful to have a sense of what you need to make on a daily basis to maintain your lifestyle. Once you have this in place, you then can begin budgeting your money on your terms.

For example, take a look at the below hypothetical monthly budget. This family, two adults and one child, has an annual household income of $50,000. Assuming a 28% tax bracket, $14,000 in taxes are paid annually leaving a net annual income of $36,000.

  Monthly Annually Daily
Bank Fees $ 20.00 $ 240.00 $ 0.66
Car Insurance $ 75.00 $ 900.00 $ 2.47
Car Payment $ 400.00 $ 4,800.00 $ 13.15
Child Care $ 500.00 $ 6,000.00 $ 16.44
Clothes/Dry Cleaning $ 50.00 $ 600.00 $ 1.64
Credit Card Payments $ 250.00 $ 3,000.00 $ 8.22
Eating Out $ 150.00 $ 1,800.00 $ 4.93
Entertainment $ 100.00 $ 1,200.00 $ 3.29
Gasoline $ 100.00 $ 1,200.00 $ 3.29
Groceries $ 400.00 $ 4,800.00 $ 13.15
Health Insurance $ 250.00 $ 3,000.00 $ 8.22
Home/Car Repairs $ 50.00 $ 600.00 $ 1.64
Internet $ 40.00 $ 480.00 $ 1.32
Mortgage/Rent $ 1,000.00 $ 12,000.00 $ 32.88
Renters Insurance $ 41.00 $ 492.00 $ 1.35
Pet Care $ 10.00 $ 120.00 $ 0.33
Telephone $ 75.00 $ 900.00 $ 2.47
Utilities $ 100.00 $ 1,200.00 $ 3.29

By breaking out their budget into monthly, annual and daily components, it's painfully clear that this family is spending more than they earn each month. In fact, if this family were to subtract their actual monthly, annual and daily income from the budget totals, they would be $611 short each month, $7,332 short each year and $20 short each day.

Totals $ 3,611.00 $ 43,332.00 $ 118.72
Actual Income $ 3,000.00 $ 36,000.00 $ 98.63
Actuals $ 611.00 $ 7,332.00 $ 20.09

One obvious solution is for this family to earn more money. To cover the $7,332 gap, this family would probably need to work an additional part-time job. And, according to this budget, the family hasn't even begun to have any savings.

Instead of being a dog chasing its tail, the family can begin taking an inventory of their expenses. Living within your means requires a family to be very cognizant of where their money is going. Creating a household budget and reducing expenses is not rocket science, but it is something that requires you to take time to audit where your money is going.

In the example above, this family is spending roughly 20% more than they earn on a monthly, annual and daily level.

Here's how to figure the math:
Monthly: ($3,611 - $3,000) / $3,000 = 20%
Annual: ($43,332 - $36,000) / $36,000 = 20%
Daily: ($119 - $99) / $99 = 20%

If this family wants to avoid being under water, they either need to shave 20% off their expenses (roughly $20 a day) or they have to earn more money to pay for their vicious cycle of debt. And, remember, this is just to break even.

Finding ways to save
Although this family can reduce some minor expenses, their largest opportunity is to tackle their bigger-ticket items, such as:

  • Car Insurance
  • Car Payment
  • Credit Card Payments
  • Eating Out
  • Entertainment
  • Groceries
  • Mortgage/Rent

Here is an audit that the family could make to their budget, line by line:

Bank Fees: This family found a bank that will offer them absolutely free checking, saving $240 annually.

Car Insurance: This family called their insurance agent and explained that they need to reduce their monthly expenses. They inquired about a multiline discount because they have their renters insurance and two cars with this agent. They increased their deductible, updated their record to show that they are commuting shorter distances to work and also showed a safe-driving record for the last five years. The family hadn't updated their insurance for a long time and realized that they were able to shave 25% off their annual cost.

Car Payment: The family found that they could refinance their vehicle at a lower interest rate than what they had been paying. This reduced their payments from $400 to $355 per month, approximately 12.5% savings per month. Another option the family considered was to sell their car and down-shift into a cheaper vehicle. Because the family already owned one car and were nearly halfway paid off on the second car, they decided that they would hold on to their existing car.

Child Care: The family really trusts their childcare giver and, therefore, this is not an option of where to cut costs.

Clothes and Dry Cleaning: The family decided that this was really a convenience that they could do without for at least the next six months with the exception of a few fine clothing items that they don't wear often. They decided that they could cut this expense in half each month, a 50% savings.

Credit Card Payments: The debt that this family is carrying is a real problem. They want to begin saving for a house and this expense is really preventing them from doing that. After researching current rates, the family was able to consolidate their three credit cards into one account at a lower interest rate. Now their minimum monthly payment would be $150. Even though that is a savings of $100 per month, to get ahead of this debt they decided to continue paying $250. And, instead of paying monthly, the family has set up automatic bill-pay to send $62.50 each week, totaling $250 a month. Because the credit card company continues to charge them daily finance charges, they knew that they would get ahead of the charges by paying a partial weekly payment instead of one monthly payment.

Eating Out: This was an area where the family knew they were eating out for convenience. They decided that they would reduce this expense to $50 a month and save the $100 by eating at home.

Entertainment: Until the family had a positive cash flow, they committed to spending $25 a month on entertainment for the next year, saving them $75 per month.

Gasoline: Since the family is moving closer to work, their gasoline consumption would be cut in half from $100 to $50.

Groceries: The family decided to plan each week's meals more closely and shop for sales. And, if they had a worthwhile coupon, they would use it but they felt that coupon clipping was very time consuming. They found that they could easily reduce their grocery bill from $400 to $350 each month even though they were eating out less. Less food was being wasted and they were eating healthier meals by bringing lunch to work more regularly.

Health Insurance: They agreed to reevaluate their medical insurance options in November when their employers allowed them to make changes. But until then, this expense couldn't be changed.

Home/Car Repairs: Saving $50 each month for their car maintenance is really smart. This prevented the family from being caught with an unexpected bill.

Internet: The family enjoyed the convenience of having Internet access at home but decided they could get a bit slower service. It saved them $20 a month, a 50% savings.

Mortgage/Rent: The family took a few weekends to find an apartment that was much closer to where they work. They were able to find a complex that was offering a month's free rent on a year lease. Additionally, because they decided to move from a three-bedroom to a two-bedroom apartment, they were able to save even more. These changes resulted in a $250 per month savings.

Renters Insurance: Due to the multiline discount with their cars, the family was able to save $16 a month on their renter's insurance.

Pet Care: The $10 a month the family put aside for their pet care paid for the annual checkup and food. No change was made for this item.

Telephone: This family was definitely tired of managing all the phone bills and found that they rarely used their home phone. By eliminating their home phone, they were able to save $30 per month.

Utilities: The new apartment they moved to included cable, water and trash pickup. Now the family was only paying for their electricity. This saved them $40 a month.

Some of these tactics may seem very simplistic but they still make a lot of sense. These changes required the family take time to research, shop around, make phone calls and change existing creditors. This may take a few hours to do and it needs to be evaluated a few times a year. Their situation could not improve until they stopped procrastinating and created a monthly budget.

Based on all the changes, the family was now living within their means resulting in a $129 surplus each month. Creating a monthly budget can be helpful, but understanding what your expenses are daily and even weekly can be an eye-opening exercise.

  Monthly Annually Daily
Bank Fees $ - $ - $ -
Car Insurance $ 56.25 $ 675.00 $ 1.85
Car Payment $ 355.00 $ 4,260.00 $ 11.67
Child Care $ 500.00 $ 6,000.00 $ 16.44
Clothes/Dry Cleaning $ 25.00 $ 300.00 $ 0.82
Credit Card Payments $ 250.00 $ 3,000.00 $ 8.22
Eating Out $ 50.00 $ 600.00 $ 1.64
Entertainment $ 25.00 $ 300.00 $ 0.82
Gasoline $ 50.00 $ 600.00 $ 1.64
Groceries $ 350.00 $ 4,200.00 $ 11.51
Health Insurance $ 250.00 $ 3,000.00 $ 8.22
Home/Car Repairs $ 50.00 $ 600.00 $ 1.64
Internet $ 20.00 $ 240.00 $ 0.66
Mortgage/Rent $ 750.00 $ 9,000.00 $ 24.66
Renters Insurance $ 25.00 $ 300.00 $ 0.82
Pet Care $ 10.00 $ 120.00 $ 0.33
Telephone $ 45.00 $ 540.00 $ 1.48
Utilities $ 60.00 $ 720.00 $ 1.97
Totals $ 2,871.25 $ 34,455.00 $ 94.40
Actual Income $ 3,000.00 $ 36,000.00 $ 98.63
Over Limit Actuals $ (128.75) $ (1,545.00) $ (4.23)

The family is now saving $1,545 a year without sacrificing their lifestyle. Once the family pays off their credit card debt this year, the $250 payment they were paying this creditor can now go into saving for a home.

By doing the math, the family knew that they needed to live on less than $100 a day based on their income. They will continue to shave off expenses where they can and even save more money if possible.

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