How to Decrease Spending to Increase Savings

Investing has always been a passion of mine. Even as a youngster who grew up on the lower rungs of the wealth ladder, the idea of investing was fascinating. The simple fact that you could make money simply by investing it just blew my mind! Of course, the big challenge was having money to invest. Through the years, I've made it a priority to find ways to save, even when I had far more investing ideas than capital on hand.

This article will discuss some of the practical solutions I have employed over the years to ensure that, despite my income, I have been able to save for the important milestones.

The first principle is very basic, but is often overlooked. This formula is the key! It is no secret, yet so misunderstood. Income - Spending = Savings. In order to increase savings, you need to either increase income or decrease spending. It is so easy to identify, yet so hard to actually do. For this piece, I am going to leave the income piece of the equation as out of the scope of this article because increasing your income is the most difficult of the 3 components. I will say one thing: stay away from work-at-home-get-rich-quick schemes! There are some valuable programs out there, namely BigCrumbs, which I have written about previously. However most of these are gimmicks and will cost your money and time. This piece will hone on how to get your spending within your budget.

The very first thing you need to when deciding to cut back on spending is to know exactly what you are spending. For this, a terrific exercise is to keep a detailed record of everything you are spending for a 30-day period. I mean every penny you spend! That $.79 after lunch snack adds up to $15.80 after 5 days a week, 4 weeks a month. If you have access to financial software such as Quicken or MS Money, terrific. If not, it is not necessary. I do most of my financial planning with a spreadsheet or pen and paper.

After you have your expenses recorded, group them into categories. Rent, Water, Electric, Cable, and so on. Keep the categories specific so you can see how much you are spending on water, versus electric. Once this is done, you should group the categories into two main columns: discretionary and non-discretionary. Non-discretionary consists of things like rent, electric, insurance, and so on while discretionary is the opposite: entertainment and dining out. Some things, like groceries, may have discretionary and non-discretionary elements, but for this exercise keep it in the discretionary column if you can't do without it.

We will start by examining the expenses that are not necessary. There's a fine balance here between being a smart saver and being a miser. I am by no means suggesting that you remove every discretionary item from your budget-that is no way to live. But, this is the easiest place to identify expenses that can be trimmed back. There are two ways I like to analyze expenses. First, household average expenses can be found at the Census Bureau's web site. You can compare what percent of your income you spend on dining out or entertainment to what the average household spends. If something is a lot higher than the average, then that would be a red flag. The second way is to put it on more personal terms. Calculate, at your current rate of pay, how many hours it takes you to earn enough to cover a particular expense and ask yourself is it really worth it? Is it worth XX hours on the clock to go out to a move and hit the concession stand? If your answer is anything but "yes", then that's an easy one to cut back on. Is it worth working for XX hours a month for that Grande café late every morning? Again, I am not suggesting deprive yourself of every non-discretionary item because that is a miserable way to live. (I seriously just noticed how closely related the words "miser" and "miserable" are when I used them in this paragraph. I hardly think that is a coincidence). The goal here is to identify things easy to trim back on and find the right balance between being smart and being happy. If you can't sacrifice family night at the movies, maybe you can avoid the concession stand. If you love your morning coffee, try to get a smaller size, cheaper cup, or splurge only every-other day. I'll say it again: find the balance that allows you to trim expenses, but doesn't make you miserable.

Now, we have trimmed back our discretionary spending but we are not done yet! Even if we finally have a balanced household budget with some room for savings, the non-discretionary side of the budget should be analyzed. Of the discretionary items, there are some clearly easier to reduce than others. Groceries, gas and utilities can all be cut back on to an extent with a little effort, while rent, insurance, and mortgage are more challenging. I could probably rattle off twenty pages of specific suggestions, but I would bore you to the point of not finishing the article. Besides, these are largely personal decisions. I will show how I analyze one category and give you a few other ideas I have come up with-the proverbial teaching you to fish in lieu of giving you a fish. To get the most return on our investment of time, we should first look at the more flexible discretionary items-groceries being the first to come to mind.

The first thing to do is determine how much you should or want to spend on groceries. Again, start with the Census data to get a general idea of how much a family your size would spend. Take into consideration any special needs you may have and come up with a figure you can comfortably meet. The key to budgeting is creating a budget that is fiscally responsible, yet attainable so as to not get discouraged. Once you know you want to spend, say, $600 a month, look it as you have $20 per day to spend. Looking at this as a daily figure instead of monthly lets you track it a little more closely and plan a little easier. If you want to have a nice steak dinner one night, you can have something cheaper the next day to help keep the daily average at $20/day. Try to plan a balanced menu that will, over the course of the month, average out to your daily budgeted amount.

We really need get to the nitty-gritty of the category by keeping a detailed record of exactly what you buy. Break it down into categories, just as we did for the overall spending. Look for things that can be cut back on easily without causing any angst. Deserts and soda are unhealthy and an easy category to trim back. Store Brands are often comparable in quality and significantly cheaper. Little pre-packaged snack packs are, ounce-for-ounce, significantly more expensive than buying the same product in a box along with a box of plastic bags to portion on your own. Buying in bulk can also create additional savings. Be on the lookout for sales, but also be aware that the reason that stores offer tremendous discounts on certain products is simply to lure you into their store to buy the rest at their less-than-competitive prices. Again, the trick is to first understand where your money is going, then identify areas you can cut back on without making yourself miserable.

Next, I'll give you a bulleted list of ideas in a couple of other categories:

INSURANCE: eliminate any unnecessary coverage. Can your deductibles be raised? Can you qualify for any discounts? Can you get a more competitive rate from another carrier?

UTILITIES: Install programmable thermostats to avoid heating/cooling the house when no one is home! Weather strip windows. Close drapes/shades on windows that have the sun shining in during the summer and leave them open in the winter. Vice-Versa for the winter. Use water-efficient showerheads. Consider efficiency when shopping for new appliances

GASOLINE: Consider MPG when shopping for a new vehicle. Fill the gas tank only in the morning or evening. Consolidate errands to eliminate unnecessary trips. Use cruise control. Have your vehicle regularly services. Check tire air pressure. Don't drive aggressively!

SERVICES: Find a no-fee back account. Use brokerages/mutual funds with low commissions and minimize commissions. Minimize ATM fees! No one calls directory assistance these days!

Again, my list is by no means all-inclusive. I hope I have attained my goal of showing you how to analyze a budget and dissect a category to identify areas to trim back your budget in order to decrease the spending part of the Income - Spending = Savings equation. Thanks for reading!