How to save on a shoe string budget

A recent study suggests how much you save has little to do with how much you make. So forget the excuses; here's a roadmap for finding money you didn't know you had.

By MP Dunleavey

Savings.

When you hear that word, do you feel a clutching sense of guilt and inadequacy? If you¹re like most Americans, you must. According to a recent study of saving behavior by economists Steven Venti of Dartmouth and David Wise of Harvard, more than 75% of respondents said they knew that their savings, specifically for retirement, were insufficient.

That’s shocking, but not as remarkable as their discovery that how much you save has very little to do with how rich you are. Venti and Wise divided the 7,700 households they studied into 10 income groups. The top 10% of the lowest income group nonetheless had saved more than $150,000 per household. Meanwhile, middle-income folks, on average, had only $45,000 in assets.

That’s annoying and embarrassing, and it means I have no excuse for my inadequate savings. And neither do you. Because what Venti and Wise found to be the most significant savings factor was no more jaw-dropping than this: Ya just gotta save it.

But hooooow, you whine? How can you save a red cent when you just barely live on what you earn? Well, since you asked: Saving is a two-step process. First you retrain your brain, and then you find all kinds of clever ways to live on less (many of which are conveniently located below).

Step 1: Retrain your brain
Saving money is a state of mind. Before you can start, you have to renounce the spending -- and stop believing you actually need all the stuff you’ve been spending money on. Just don’t. Spend, that is. Sure you want it, but that’s no excuse for buying it. The next time you want to buy something, take the $50 or $100 out of your wallet, and stash it somewhere. See? That’s called saving. You don’t end up with stuff; you end up with MONEY. A few other tips for the brainwashing you¹re about to do:

Accept frugality as your savior. Become a closet cheapskate and emulate your frugal friends. Note that they fix the shower curtain instead of buying a new one. Sit down with Depression-era relatives and ask about economizing. That’s what I did. And, yea, did the spirit of saving take hold of me!

Seek inspiration. Get thee onto Google or Yahoo! or MSN Search and type in "living cheaply," "frugal living" and "voluntary simplicity." You’ll find a gazillion websites devoted to living on less, including thefrugalshopper.com, simpleliving.net and frugaliving.com.

Cry poverty -- with style. Learn handy phrases like, "Let’s eat somewhere cheap." And "Shopping? Blech. Let’s go for a bike ride." It’s less embarrassing than you’d think, because more people are in your shoes than you think -- and they’ll be grateful you spoke up.

Step 2: Now save it!
There are a thousand ways to live on less. But you don’t want to make your life a misery. Here are some of the most painless ways you can economize, without losing out on quality of life.

Don’t even think about it. Direct deposit is a saver’s best friend because the money is whisked away into your IRA, 401(k) or money market account -- and you don’t have to do a thing. Except drop by your payroll department and/or your bank and fill out the damn forms. Today.

Go veggie. If you can do three meatless days a week (without substituting pricey fish), you could save $25 a week, which equals $100 a month, which equals $1,200 a year! Beans: Ya gotta love ‘em.

Play money games. Whenever you get a $5 bill, put it aside. Or do it with ones, with quarters, or all your spare change. You’ll have a nest egg before you miss a nickel.

Never spend a windfall. Take your income-tax refund, that holiday money from your folks, the $16.35 overpayment check from the telephone company and any other extras and save ‘em.

Haggle. You’d be amazed at who will drop their prices, fees and interest rates: airlines, hotels, credit card companies, computer/appliance/rug salespeople.

Re-evaluate. Re-evaluate. Re-evaluate. That dinner out cost more than you spend on groceries in a week. That pair of shoes is worth half a commuter pass. Learn what your money is worth, and you won’t be so quick to dispose of it.

Don't overpay your taxes. Sure you love to get a fat refund from the IRS every spring. The fact is, however, you're effectively lending money to the government interest-free. Go through your tax return and see if you can plan your withholding so you get to Dec. 31 maybe getting a $100 refund. That way you can use your money NOW. (And bank the refund when you get it.)

Raise your insurance deductibles. Reassess the deductibles for various kinds of insurance. If you can raise them, your premiums drop.

Get your mortgage costs down. First, look at whether the rate is too high. If it is, look at refinancing -- if you’ll save money. Next, let’s look at the private mortgage insurance (PMI) you’ve been paying because you didn’t have enough money to make a 20% downpayment. You’re protecting the lender, not you. If the equity in your home is greater than 22%, demand that your lender cancel it. It’s the law. Lastly, pay ahead on your mortgage. If you can swing an extra $100 per month, you will save thousands in interest costs over the long haul.

Toss the catalogs. The most insidious form of spending temptation known to man or woman. Chuck them straight in the trash. Yes, including Victoria’s Secret. Sorry, guys.

Don’t pay unnecessary fees. Like the $1.50 you pay just because the ATM is right there, right now as opposed to walking two blocks to your bank, where you don’t get charged every time you use your cash card. Or the late fees for returning videos. I know a woman who paid $60 in late fees to a video store last year. (It wasn’t me.) (Ok, it was.) Or those fat charges banks hit you with when you write a check that, well, bounces.

Clean it yourself. I’ve discovered a nifty trick: When a clothing label says, "Dry Clean Only," I wash it. Or I dab out that little coffee stain with an old-fashioned cleaning device known as a sponge.

Never pay a pro. If you can fix the neighbor’s car, and she can paint the bathroom: do it.

Bank your raise. You may find that measly 3% to 5% boost in the paycheck irritatingly tiny. So add that to your direct deposit and live on your previous salary.

Pay less for long-distance. Evaluate your phone bill and see how much you're paying per minute. Some dial-around codes or cheap calling cards (one without a surcharge per call) may give you a better rate. Not only do you save, but you may find you won’t need to speak to Al in Schenectady so often.

No pet pampering. Does your dog need those pricey snacks? Does your cat need acupuncture? We didn’t think so.

Never pay full price. If you must shop, for pete's sake, discover the online world of discount Web sites. Ebay is still OK, but half.com and craigslist.org are excellent sources of "lightly used" goods -- everything from books to jewelry to office furniture -- to the entire first season of Star Trek on video.

I could go on an on, but let’s stop here. If you follow even a few of these tips (as I have) you’ll end up with a substantial chunk of extra cash every month. Just stay in the savings state of mind, and don’t blow it on those post-holiday sales, OK?

Simple way to save

A simpler way to save: the 60% solution

Twenty years of complicated budget calculations have led me to this one simple conclusion: By limiting all essential spending to 60% of total income, savings will soar.

By Richard Jenkins

How many of you have tried budgeting and think it's a waste of time? Come on, let's see those hands.

OK, that's just about everybody.

I've kept a budget of one kind or another, first on paper and then with the help of various software programs, for about 20 years -- despite a strong suspicion that I was wasting my time. The illusion of control, I argued to myself, was better than none at all.

My approach to budgeting was to carefully track my spending during the month and to adjust my budget targets up and down in each category, so that my total expenses never exceeded my income.

Laborious? You bet.

Useful? Sometimes.

Anal-compulsive? Probably.

After two decades of this, though, I started to wonder if there isn't an easier, more effective way to budget. I realized that the hardest part about keeping a budget is getting useful information from it. There's too much detail and not enough bottom line. My answer is "the 60% solution," a faster and easier way to structure your budget without having to account for every penny.

What you're trying to do with a budget is to prevent overspending, which ultimately leads to piling up debt. Contrary to the way most people budget, however, it rarely matters what you're overspending on -- dining out, entertainment, clothes. Who cares? It's still debt, right?

Looking at my own spending history, I realized that it wasn't the little luxuries here and there that got me in trouble. It was the large, irregular expenses, like vacations, major repairs and the holidays that did all the damage. To avoid overspending, I had to do a better job of planning for those.

And then there were the really big expenses: buying a car, putting a down payment on a new home or putting a new roof on an old home -- all of which can run into the tens of thousands of dollars. They also can often be postponed, sometimes for years, which theoretically should give me a chance to save for them.

Understand your committed expenses
As I looked back over the past 20 years of budgeting, I saw that there were a few years when my wife and I believed we were fairly on top of things, even with a much lower income than we have today. How did we manage?

The key was a drop in our fixed monthly expenses. It was a period when declining interest rates had lowered our adjustable-rate mortgage payment to about 15% of our household income. That left us with some extra money each month to set aside in a savings account for those irregular expenses.

We later moved to a bigger house with a much bigger mortgage payment, higher maintenance costs and utility bills, and obscene property taxes. The monthly mortgage payment was only 20% of our gross income, far lower than the 33% that most lenders will allow, but, suddenly, we were struggling again.

Even after refinancing our mortgage at a lower rate, we were still often running out of cash before the end of the month. I realized that other fixed expenses had crept upward over the years. As my children, Natalie, now 17, and Jackson, 14, have gotten older, they need things like music lessons and sports equipment that can add several hundred dollars a month to our basic expenses. They're also outgrowing clothes faster than we can buy them.

The slow but steady growth in our monthly spending commitments was putting a squeeze on our budget. I call these "committed" expenses rather than "fixed" or "non-discretionary" expenses, because things like music lessons are neither fixed in amount nor absolute necessities, but rather are commitments my wife and I have made to provide for our children.

The 60% solution emerges
After analyzing our spending patterns over the past couple of years using our Microsoft Money data file, I determined that we needed to keep our committed expenses at or below 60% of our gross income to come out ahead at the end of the month.

Committed expenses:
* Basic food and clothing needs.
* Essential household expenses.
* Insurance premiums.
* Charitable contributions.
* All of our bills -- even such non-essentials as our satellite TV service.
* ALL of our taxes.

I'm not saying that 60% is a magic number. It's a workable goal for my family, and it's a nice round number. But your number might well be a bit higher or lower. At any rate, it's a good place to start.

Then I divided up the remaining 40% into four chunks of 10% each, listed here in order of priority:

Retirement savings: consisting entirely of my 401(k) contribution, which is subtracted automatically from my paycheck.

Long-term savings: also automatically deducted from my pay to buy Microsoft stock at a discount as part of an unusual stock-purchase program. The relative lack of liquidity (i.e. the difficulty of turning these shares into cash) makes it harder to spend this money without some planning and a series of deliberate steps. In a real emergency, though, I could sell and have the cash wired into my bank account within three days, so this is also our emergency fund.

Short-term savings for irregular expenses: which are direct-deposited from my paycheck into a credit union savings account. Money in this account can be easily transferred into our checking account, as needed, via the Web. Over the course of a year, I expect to use all of this money to pay for vacations, repairs, new appliances, holiday gifts and other irregular but more or less predictable expenses.

Fun money: which we can spend on anything we like during the month, so long as the total doesn't exceed 10% of my income.

You may have noticed that only 70% of my paycheck is used for everyday expenses. Since we never see the other 30%, my wife and I generally don't miss it.

We don't really need to track our expenses, because our checking account balance is generally equal to the amount of money we can spend. That's the way a lot of people do it, but they don't first make provision for savings.

The key is keeping a lid on those committed expenses. You can categorize them if you want, but it isn't really necessary. In fact, you could make a budget with just three categories: committed expenses, fun money and irregular expenses, and that's just what I've done with the budget in Money 2005 (see chart below). (I can't really give up my anal-compulsive ways completely, so I've also created a set of subcategories to track the committed expenses, partly because that also allows me to export parts of my spending data to a tax program at the end of the year.)

Now, at this point you may be saying, "Well, la-dee-dah for you, but there's no way I can get my committed expenses down to 60% of my income."

How to get your spending down
For a lot of people, part of the difficulty in reducing committed expenses comes from the need to make big monthly credit card payments. If you're carrying a substantial amount of non-mortgage debt, I'd suggest using the 20% that would otherwise go to retirement and long-term saving to aggressively pay down your debt -- but only after you cut up those cards.

Every dollar in interest that you don't pay is just like getting a guaranteed, risk- and tax-free return on your money equal to the interest rate on the debt. When your debts are paid off -- and it won't take long using 20% of your gross income -- immediately redirect that money into savings.

Now, let's take the really hard case: Even excluding debt payments, reducing your committed expenses to 60% still seems like an impossible goal. If that describes your situation, the odds are good that you're facing one of the following problems:

* You have a more expensive home than you can afford.
* You've committed to car or boat payments that are larger than you can afford.
* Your children are in a private school that you can't really afford.
* There's just a big, ugly gap between your income and your lifestyle.

If it's one of the first three, you can undo the damage by slowly unwinding the commitments you've made and choosing something less appealing but ultimately more appropriate. You might also be able to take other steps that could help to reduce your committed spending, outlined in "7 radical ways to save money."

If the problem is having champagne tastes on a beer budget, you'll need to take a long, hard look at where the money is going and why. Take the "Savvy Spending Quiz" on MSN Money to see if perhaps you're using money and things to fill a void in your life. Often, the steps needed to fill that void have little to do with money.

The real secret to building a budget that really works isn't tracking what you spend, any more than counting calories is the secret to losing weight. The key is creating a sustainable structure for your finances, one that balances spending and income and that leaves enough room to handle the unexpected.

Affirmation power

Here is a great way to create affirmations that may be helpful to you.

Here's how it works: You start off the affirmation with "Today I choose..." then fill in a quality or thought habit that you wantto condition into your thinking.

Then repeat it often during the course of the day, especially when you are about to make a decision or engage in a behavior that is directly related to what you intend to create. Let it act as a compass to guide you so that you keep moving in a straight line directly towards your goals regardless of what others may do.

So, for example, you might say, "Today I choose to be wealthy." Here are some sample times when you may want to repeat this to yourself:

> When you make deposits to your accumulation plan (I like the word "accumulation" much better than "savings").

> When you spend money. I use this to check myself to see if I'm turning cash into trash, buying a doodad, or buying a potential asset.

> When you think you have to watch some television to unwind (instead of studying to be wealthy).

> As I'm listening to a success oriented audio book or studying financial intelligence.

> As I go to work. As I research assets to purchase. When I even think about using a credit card or some other type of debt.

I'm sure there are all kinds of other situations where I repeat it. What this does is set the direction of my thought to focus on activities that lead to wealth. I'm consciously choosing my thoughts rather than simply walking around unconscious of my thoughts and actions. It helps me think through the consequences of my actions in advance so that I make better choices.

Sometimes for variety, I may replace the word wealth with other variations, such as:
· Today I choose to accumulate wealth.
· Today I choose to be financially intelligent.
· Today I choose to create massive abundance.
· Today I choose to spend my money wisely.
· Today I choose to live debt free (that is no bad debt)

You get the idea.

This formula also works for far more than accumulating money. Let's say you need to improve your health or to loose weight. How about:
> Today I choose to be healthy.
> Today I choose to be thin.

Here is why this affirmation formula is so powerful. Once you reach the age where you can start to make choices, the quality of your life is largely governed by the choices you make for yourself. Every choice you make (either consciously or unconsciously) is a cause set in motion.

If you want to improve the quality of your life, it starts by improving the quality of your thoughts andyour choices. If you are not satisfied with the quality of your life, it won't change until you improve thequality of your thoughts and your choices.

This affirmation acts as a pattern interrupt to help you think through your action to make certain it isconsistent with the choice you say you are making. This is why it is important to literally say the words, not just think them.

They also help you make better choices, because they are almost always going to be positive. Who in their right mind would say:
· Today I choose to be poor.
· Today I choose to accumulate massive debt.
· Today I choose to be fat.
· Today I choose to be unhappy.
· Today I choose to be rude and obnoxious.

I cringed even as I typed the words. I think back to a commercial I saw a while back that showed different children saying things like: "When I grow up I want to be under appreciated" or "I want to be downsized." I can't remember what the commercial was for, but it was very funny. Why? Because they were so serious—like they were saying "When I grow up, I want to be a doctor."

The statements were obviously meant to be ridiculous. But...how many of us unconsciously say these very things to ourselves by our negative thoughts,self-image, and actions--our choices? Another reason this formula is so powerful is that it focuses your mind on "Today."

Today, right now, is all we really have. You can't take actions in the past. You can only plan for the future (and planning is important--see http://www.poweraffirmations.com/RAP.htm to review my personal planning process).

But we can only make our choices and take action in the moment--now. Today. How many times did you plan to take a certain action, but didn't for one reason or another? That happens to all of us all the time--often for good reasons.

While you must learn from the past and plan for the future, you have to live in the moment. In many ways, "time" is an illusion. So, resolve to do to live consciously. Don't just make better choices, make outstanding choices.

Here's a great thing about choice: as you consciously make outstanding choices, you have the added benefit of rejecting poor or mediocre choices without any extra effort. As these outstanding choices begin to stack on top of each other, it won't be long before you begin to see massive improvements in your life.

Here are some affirmations to choose from: Today I choose...
· to be wealthy.
· to live debt free.
· to live an abundant life.
· to be outstanding.
· to be successful.
· to buy assets.
· to be healthy.
· to be happy.
· to be grateful.
· to be an outstanding _________ (singer, business man or woman, accountant, etc.)
· to be courteous and kind.
· to be a good driver.
· to be neat and organized.
· to live at peace with myself and others.
· to forgive others.
· to be persistent.
· to be an outstanding community leader.

As you can see, the list is endless and the formula is simple. Use it to start making better choices today!