Want To Save Over $25,000 a Year? Try This 6-Step Strategy
There’s no doubt that big life changes can take a toll on one’s mental health and financial well-being. How one chooses to respond to major life shifts will differ from person to person depending on one’s circumstances and coping skills.
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For aerospace physicist and occasional freelance writer Ed Coleman, a “devastating divorce” served as the impetus to get his financial house in order and save more than $25,000 a year, using six simple budget strategies to do so.
And his plan involves little more than straight-forward calculations, organization and honesty. By following these six steps, perhaps you can save more than $25,000 a year, too.
1. Determine Your Take-Home Pay
You have to start at your base — and that means determining your take-home pay. Your take-home pay is the amount of income you receive into your bank account after taxes, benefits and contributions have been deducted.
“Take-home pay is the number that’s on your paycheck or pay stub for a regular (no-overtime) work period. Things like your 401(k) deposits, insurance, and taxes come out first, but you don’t have to worry about that. It’s the actual deposit that matters,” Coleman said.
2. Calculate Fixed Expenses
Once you have your take-home pay calculated (or an accurate monthly average), you can start considering your fixed expenses. In business, fixed costs are expenses that don’t change, no matter how much a business produces or earns.
Personal fixed expenses are the same, but potentially easier to manage because you can set them up to be automatically paid every month. That way you’ll never miss a payment and will barely think about them coming out of your savings. “The more fixed expenses you have, the easier your budget becomes,” stated Coleman.
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3. Forecast Your Variable Expenses
While you can “set it and forget it” for steps 1 and 2, Coleman’s third strategy takes a bit more planning and sacrifice. Discretionary and unpredictable expenses like groceries, restaurants and gas may be harder to figure out, but need to be estimated for your savings plan to work.
Coleman stressed honesty — constant overspending will throw your budget out of whack every month, so this step might take a little trial and error. “It’s important that you keep the variable expense budget healthy,” said Coleman. “Don’t make it so lean that you blow the budget every month or can’t cut out fat when things pop up.”
4. Budget Personal Expenses
You’ll need to set aside some of your income for personal expenses — things you spend money on that don’t fit into either fixed or variable categories, like gym memberships, haircuts and nonessential purchases.
“My wife and I each get $500 a month of personal money,” Coleman explained. “This money is ours to spend or save as we like, and we never have to worry about it. Also, since it isn’t used for anything critical, you just spend however you like until it’s gone, or don’t. It doesn’t matter.”
5. Work Through the Numbers
Coleman’s strategy is simple on purpose. “Budgets don’t fail because you do math wrong. They fail because they are too complicated,” he said.
Once you’ve totaled your fixed, variable and personal expenses, subtract them from your take-home income and what remains is your savings. Having as much money “left over” from expenses as you can is the goal, but some prospective savers have more expenses and financial responsibilities (or hardships) than others. If you truly want to save, you can at least start small until the time is right — then, you can commit more money to your savings or forfeit unnecessary personal expenses.
6. Separate Your Savings
Once you have crunched the numbers, you’ll have to take action. Don’t worry, like the five previous steps, the sixth isn’t complicated. By setting up automatic deposits and transfers to separate accounts for expenses and savings, you’ll easily manage your money and never miss a month. Adjustments might be needed along the way, but once you’ve set your plan in motion, it shouldn’t need constant attention.
If you find you’re running out of money every month and aren’t sure exactly what you’re spending it on, a budget is mandatory. But it has to be simple enough to work without too much monthly managing. By following Coleman’s 6-step strategy, you’ll be surprised at how organized you can be — and how much you can sock away once you start seeing savings results.
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This article originally appeared on GOBankingRates.com: Want To Save Over $25,000 a Year? Try This 6-Step Strategy