How To Budget & Save 40% Of Your Income

by Millie Kay G. on Managing Money

Up to this point, my savings goals have been pretty vague. Yes, I need to set aside money for retirement and college, but figuring out how to allocate so many dollars for the electric bill, car insurance, and everything else seems like an eye-glazing process. However, I’d like to try out a particular budgeting strategy that can help me learn how to save up to 40% of my income.

40% can seem like an extreme amount to save during a recession, so I wouldn’t depend on this to become an overnight goal. Instead, I need to take the time to evaluate my income, expenses, and savings goals as I explain below.

How To Budget & Save 40% Of Your Income

1. Do an Income Check

First, I need to list my sources of income and find out how much I bring in each month. This can include a salary, tips, proceeds from online auction sales or investments, or freelance income.

2. List Expenses, then Cut Back a Bit

Then it’s time to see what sort of regular expenses I have: mortgage or rent, groceries & household goods, transportation, utilities, school-related expenses, clothing, entertainment, gifts, insurance, credit card bills, and others. If I need to estimate, I can go back over my records for the last three months or compare this year to last year.

Quicken and YNAB are great budgeting tools that help you get a handle on your money. I’ve written a YNAB (You Need A Budget) review to give you more details on this software product.

Throwing in a specific category in your budget for a small weekly or monthly treat may help head off any feelings of resentment or deprivation. For instance, I enjoy video games and I know where to find used games at reasonable prices; I can also sell off my old games in order to keep this particular budget category under control.

What about trimming the expenses? I can cut back on categories that won’t be so painful, such as entertainment, clothing, the internet plan, vacations, the long distance plan for the landline, groceries, or gifts. Also, I can look at a cheaper cell phone plan, make less expensive choices when eating out, or I can probably trade in a gas guzzling vehicle for something more fuel efficient.

If I’m not up to forswearing the coffee like David Bach suggests with his Latte Factor, then maybe I can downsize in another area, like my debts, so that eventually, I’ll have a 60% expenses to 40% savings ratio.

3. Debt: Pay It Off Faster

Debts such as credit cards, student loans, personal loans, and auto loans are a big drain for many of us. Paying off debt like a 19% credit card with a $9,000 balance can seem like a never-ending marathon. To shorten the race, I can try to call and ask for a lower interest rate. This has worked for me in the past.

If I’m about to embark on the hunt for a new auto loan, I’ll need to evaluate just how much car I need. Can a $13,000 car haul me around as well as a $30,000 one? Is there a way for me to transfer my current credit card balance to a card with a much lower rate? Questions like these can make me pay down debt at a much faster rate, which can help me move more money into savings. Here’s a look at some 0% balance transfer credit cards that may offer you better low rate options:

Credit Card
Interest Rate
Transfer Fee
Discover Escape Card 0% for 6 months 3% transfer fee
Discover Miles Card 0% for 6 months 3% transfer fee
Discover More Card 0% for 12 months 5% transfer fee
Discover More Platinum Card 0% for 12 months 3% transfer fee
Discover More Sealife Card 0% for 6 months 3% transfer fee
Discover More Clear 0% for 6 months 3% transfer fee
Discover More American Flag 0% for 6 months 3% transfer fee
Visa Black Card 0% for 6 months No balance transfer fee / $495 annual fee
TrueEarnings Card from American Express and Costco 0% on purchases for 3 months, 1.99% bt for 6 months No balance transfer fee
Starwood Preferred Guest Card from American Express 2.9% for 6 months No balance transfer fee

4. Say It Like a Soccer Announcer: $Gooooal!

Having specific financial goals gives us focus. So I thought I’d outline several savings categories with specific amounts to target. These categories can include:

  • Short Term: These would include things like the tires I’ll need soon, the trip I might need to take to see relatives, or irregular expenses.
  • Emergency Fund: Instead of relying on credit cards the next time I have car or job trouble, I can start building up a cushion to eventually equal a few months of expenses.
  • Investing: After my debts are paid off, I can attempt to grow my wealth through investing.
  • Retirement: A retirement calculator can give me a minimum savings target.
  • School: I can estimate tuition, dorm, and other school expenses ahead of time.
Start saving money with any amount. Every dollar helps!

5. It’s Not Magic, It’s Automatic

Going to the bank to transfer money from checking to a high yield savings account can eat up too much time on a work day. Instead, I can use an automatic savings plan to pull out the money from checking on paydays, and I can set up transactions at certain times each month.

To help with automated investing, check out FNBO Direct or HSBC Advance, which offers great ways to expedite your savings efforts. Check out our HSBC Advance Review for more information.

What about additions to my regular income, like bonuses, raises, inheritances, income tax refunds, or even the $50 bill that Granny handed me for my birthday? Much as I’d enjoy a new smartphone or a dash through the department store, my savings will grow faster if I stash 40%, then retire some debt with the rest.

If 40% seems like a high percentage, I can try 5% this month, then scale up to 40% over a period of time. Besides, a drastic change to the finances overnight is less likely to stick than a goal that doesn’t seem punitive. If 5% seems high, then I can just start with $5, then try $10 the next month so that savings becomes an established habit.

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{ 3 comments… read them below or add one }

1 LaToya April 5, 2010 at 6:55 am

I really enjoyed reading this article.

It is interesting to see how different people talk about money, since it is such a huge commodity in our world, especially in Western culture.

Just started a blog myself (still in its early stage of development), it focuses on ways to be a savvy spender and saver, with a added little wit.

Check it out


2 Catie April 12, 2010 at 12:06 pm

This is really good advice. And even if it sounds unattainable (not to me necessarily), it’s better to have a high goal and get close to it then do the bare minimum. Thanks!

3 JeffG May 6, 2010 at 7:25 am

I started with something small with my budgeting. I went straight for my cell phone bill and looked at how I could cut that down. I did some research and figured out going prepaid would be better for me. I am now using Net10 and paying less than half of what I was before, saving hundreds annually. Getting money matters under control is just taking it one step at a time, I just hope I can get there soon…

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