Note that this a net amount or take-home income after deductions from paycheck or applicable taxes. If you have an income that fluctuates from month to month, use your average income over the past six months, or a number slightly below average to represent your monthly income. It is always better to choose a lower number, that way you’re more likely to end up with more income then planned, rather than less.
There are two basic types of expenses to be aware of — fixed expenses, and variable expenses. Your fixed expenses stay the same month-to-month and typically include things like rent, utilities, phone/internet, debt repayments or insurance. Variable expenses change month-to-month and may include food, entertainment, gasoline, or miscellaneous purchases. If tracking your expenses manually is too challenging, consider using software like Quicken or Mint. With these tools, you simply sync your bank accounts with the software, and the software will track your spending for you, by category. This gives you a clear, organized, and up-to-date vision of your spending.
If your monthly income is $2,000 per month, and your total expenses are $1,600, you technically have $400 to pay yourself first with. This gives you a good baseline idea of how much you may be able to save each month. Note this number can potentially be much higher. Once you know the current amount of leftover money you have, you can take steps to reduce expenses to make this figure even higher. If you are negative at the end of the month, reducing expenses will become even more important.
For example, your cell phone bill may be fixed every month, but is it possible to drop down to a plan with lower data to save money? Similarly, your rent may also be fixed, but if your rent takes up more than half of your income, you should examine perhaps downgrading from a two bedroom to a one bedroom apartment if possible, or relocating to a more affordable area. [1] X Research source If you have car insurance, be sure to contact your broker each year to see if there are better deals available, or alternatively, continually shop around for better deals. If you have high levels of expensive credit card debt, consider a debt consolidation loan to reduce your fixed interest expense each month. This will allow you to pay off your credit card debt with a lower interest rate consolidation loan.
When looking to reduce these expenses, think about what you want, versus what you need. Look to cut out as many wants as possible. For example, you may need to have lunch every day at work, but purchasing lunch at the cafeteria is a want. You could select the more affordable option of making a lunch each day. The key is to look at variable expense areas that take up a large portion of your budget. Is most of your extra spending on gasoline, food, entertainment, or impulse purchases? You could target reductions in those areas by using more public transport, packing more lunches for work, opting for more affordable entertainment choices, or leaving your credit card at home to reduce impulse spending, for example. Do an online search to find innovative ways to reduce your variable expenses in areas you struggle with.
Assume monthly income is $2,000, and your expenses were $1,600. After looking for expense reductions, you may have managed to find $200 in savings each month, bringing your monthly expenses down to $1,400. You now have $600 left over each month.
The best solution is to pay yourself as much as you can based on your leftover amount each month. For example, if you have $600 left over at the end of the month, and your income is $2,000, you would be able to save up to 30% of your income. (You may only want to put 20% of that in savings, leaving yourself a little wiggle room for unexpected treats or expenses. )
For example, you may want to save for a $50,000 home down payment. If you have $600 left over every month and choose to save $300 of that, it would take you a very long 13 years to save $50,000. In that case, you could boost your savings amount to $600 to drop the time in half (since you have $600 left over). Keep in mind that if you invest your money in a high interest savings account, or in other types of investments, the return you get would further shorten your time. To figure out how fast your saving amount will grow at a certain rate of return (say 2% per year), go online and search “Compound Interest Calculator. "
Consider opening a high interest savings account. Many institutions offer these, and they typically pay rates that are well above a checking account. You can also consider opening a Roth IRA for your savings. Roth IRA’s allow your wealth to grow tax-free over time. Within a Roth IRA, you can purchase stocks, mutual funds, bonds, or exchange traded funds, and these products all offer the opportunity to earn a higher return than a high interest savings account. Other options include traditional IRAs or a 401(k).
