How To Budget & Save 40% Of Your Income

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.

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:

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.

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.

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.