In a previous post on saving, I outlined the 10% savings rule which is quite simple. If you save 10% of your net income you will be able to build up a good amount of cash over time. This 10% rule works best if you start saving early in life say in your 20’s; if you start later the 10% rule could be the 15% or 20% rule, it really is up to you.
With so many demands on our finances from rent and mortgages to toothpaste and clothes, how do we find the money to save 10%+ of our income each month? The solution is easy, spend less! Putting this into practice however is more difficult and is a very personal process. The choices you have are:
1) Eliminate one expense entirely
2) Cut back a little across many areas
3) Use a combination of options 1 & 2
Putting aside rent and debt repayments, let’s look at discretionary expenses. For example, George has the following monthly expenditures:
$150 for clothes
$300 for groceries
$100 for his mobile phone with data plan
$75 on TV
$40 for his morning coffee
$300 dining out and alcohol
For a total of $965 per month
Option 1 – Eliminate certain expenditures
So what’s George to do? Should he stop buying clothes, eliminate TV and dining out all together? This would net him $525 in savings per month or $6,300 a year. That’s a huge difference! It’s up to him how much of a sacrifice he is willing to make.
Option 2 – Make small cuts to all expenditures
The option I prefer however is to make cuts across the board without eliminating anything entirely. This still allows you to reasonably maintain the same level of lifestyle while making smaller sacrifices.
Using our George example, he could:
Buy fewer clothes each month (Save $50)
Purchase cheaper cuts of meat to lower his grocery bill such as chicken thighs, round steak or pork instead of chicken breasts or strip loin steaks (Save $50)
Downgrade his voice or data plan (Save $20)
Cancel any specialty channels such as HBO, etc (Save $20)
Stop buying brand name coffee and brew it at home (Save $30)
Dine our once per month and cut back on drinking (Save $150)
Total savings of $320 per month or $3,840 a year.
Option 3 – Cut some expenditures and make small cuts to the rest
This is the hybrid approach, George could make the small cuts as mentioned in Option 2 but instead of just cutting back on TV, he could eliminate TV entirely resulting in even greater savings.
As you can see, the choice is yours. Remember that it is very difficult to just cut certain things out of your life entirely. You will have much greater success if you phase cuts in over time and maintain a steady pace of saving. Regular transfers on pay-day from your checking account to your savings account are a great way to achieve this.