Ask Money

How to save more

Chris Farrell Sep 29, 2010

Question: I need help in developing a saving plan. I have a steady/stable job, a house, and a retirement plan to which my employer contributes 10% of my annual salary and I add another 5%. My wife (currently a home-maker) and I have 2 children, one in college. We have no savings because we end up spending everything I bring in – some of it for college expenses (we do have some college loans), but also on things that sometimes we may not need, but we do it because have the money. I would like to start a savings plan so that we have money for emergencies and for our future. How do figure how much I can afford to save and what sort of saving options should I choose – mutual fund/CD/money market? Thanks! Ashish, Cincinnati, OH

Answer: The simplest, most effective way to start a savings plan is to “pay yourself first.” The easiest way to accomplish this is to automate your savings. It’s setting a program on your own reminiscent of having money automatically taken out of every paycheck to go into your 401(k). Well, you can do the same thing with your checking account and have the money automatically transferred into a savings account.

I would start small, say, $100 or $200 every month. You can put aside more or less at first, too. What matters is establishing the account. You can then see how you do and, hopefully, increase the amount over time.

It’s an unpopular recommendation, but I would also recommend creating a budget for your household. A budget is simply a way to seize control over your finances. The payoff from a budget is that you end up spending your money where you want and save for what you would like to do.

It’s important to come up with a budget system that’s comfortable for you. The good news is that technology makes it easier than ever to budget. For instance, the new generation of online services for budgeting is terrific, such as Mint.com. It’s remarkably easy to use. Mint will aggregate all your credit card, savings, investment, mortgage, auto loan and other financial data. You mine the information to see where your money is going. The program also has built-in guides for attacking your most expensive debts first. Mint is a monitoring tool (you can only read the data, you can’t transfer money around) that facilitates budgeting. Many banks, credit unions and other financial institutions are also offering improved online budgeting programs to their customers.

By the way, it’s fine if you prefer monitoring spending with an old-fashioned notebook and pencil, making simple additions and subtractions on a cheap calculator. It’s more than adequate in most circumstances.

Budgeting is a tool, not a goal. You don’t need to devote a lot of time to this. You shouldn’t have to track your spending data over the years unless you want to or have a good reason for making the effort. Ballpark figures and estimates suffice for most people over time. “Do you they really need to be tracking all spending on a monthly basis?” asks Eric Tyson, the author of a number of the best selling personal finance for Dummies series. “Because if you set a specific savings goal like we’re going to save 10% of our income or 8% of our income each month and you’re able to do that, then my feeling is who cares where it goes after you have accomplished that savings.” He’s right.

You’ll find savings through a combination of making savings automatic and a budget. I would stick for now with a savings account until you build up a nice nest egg.

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