Part 1 in a 4 part series on how to save money and make your dreams come true.
The number one question that Brian and I are asked about our trip, even more often than “where are you going?,” is “how are you saving all of that money?” For those of you that have specifically wondered how we’re doing it, I’m going to lay out every single money-saving thing we do in a 4-part series of posts over the next month. Hopefully these tips can help you save for your own RTW or any other big dream you have that requires a little funding.
Part 1 of the series is on the key principles that Brian and I use to deal with our money. In the following weeks I will also post about saving money at home, saving money on your bills, and saving money by using less stuff.
For the record, I don’t pretend to know everything (or even much) about money. I’m not freaking Suze Orman. But I do know that I’ve figured out a way for Brian and I to save a whole bunch of money on regular-people salaries. I’ve found a way to be completely comfortable with money. We don’t fight about it and it causes no stress in our lives. Trust me, I’ve lived the other way, and it isn’t any fun.
Money Saving Principles We Live By
Principle # 1- Know what you make
I’ve always meticulously tracked the money we spend but it actually took Brian and I a while to figure out how much money we make, after taxes. I bet there are a lot of people out there that don’t really know how much money they bring in. You can’t save money and track your finances until you know what you’re starting with.
Putting it into action: Sit down with the last three months of your pay stubs and look to see how much you bring home each month. If your household has two incomes, make sure to include both in the calculation. Maybe you’re payed the exact same amount of money each paycheck. If so, lucky you! This will be easy. If you’re like me, your take home pay changes slightly from paycheck to paycheck. Sit down and figure out how much you’ve brought in over the past three months. Divide by three and use that number as your average monthly income. Remember this number. It’s the total amount of money you have to pay bills, buy groceries, and save towards your dreams.
For the sake of this exercise, let’s say that your total monthly household income after taxes is $5835 (about $70,000 a year after taxes)
Principle #2- Know your bills
Now that you know how much money you bring in each month, you need to figure out how much money goes out the door. I keep a list of our bills and I know how much money we pay, on average, towards those bills each month. For the most part, the bills don’t change. Our cell phones always costs the same, the trash bill always costs the same. The electric bill goes up in the winter and down in the summer.
Putting it into action: Sit down and make a list of every single bill you’ve paid for the past three months. You’ll have your traditional bills: rent or mortgage, electric, cell phones, cable, school or car loans. Then you’ll have bills that you pay once every few months. For example, our trash bill comes every other month and our water bill comes once every three months. Brian and I play soccer and every three months we pay $150 in fees. Do you have a gym membership? Add it to the list. Does your kid take swim lessons or go to the babysitter? Add that to the list too. Once you’ve made a complete list of every single bill you’ve paid in the past three months add the total up and divide by three. This is the average monthly cost of your bills.
For the sake of this exercise, let’s say that your total monthly bills are $2250
Principle #3- Track every dollar you spend
Now that you know how much money you make and how much money you spend on bills, its time to find out how much money you spend on everything else. I carry around a bank ledger and literally write down every single dollar I spend as soon as I spend it. Yes, I’m teased about it by my friends. Yes, I feel like grandma every time I do it. But you know what? I saved almost $30,000 last year by following this dorky rule, so I’m okay with it. You won’t believe how often I’ve caught mistakes, like double charges at a restaurant, because I track what I put in my ledger and compare it to my online bank account. Another added bonus is that I always know how much I have in my account so I’m never hit with costly overdraft fees for overspending.
Brian and I have gone through this exercise and determined that we can live pretty comfortably by giving ourselves $425 each in spending money when we are paid every two weeks. Is this a lot? I have no idea. But that’s what works for us. We’ve found that we can usually afford to make about one big purchase with this money per paycheck (taking the dog to the vet or buying a new pair of running shoes), go out to eat a few times a week, and generally do what we want to do (Except for shopping. We do not shop, but I’ll deal with that in another post).
On this budget, we usually run out of money a few days before we are paid again, so we just sit home and twiddle our thumbs until we have more money! We never, ever take money out of other accounts to supplement our spending money. If we spend all of our money the first day we are paid, tough luck. It’s just going to be a long two weeks until payday rolls around again.
Putting it into action: Get a ledger. No really, do it. You’ll feel dorky at first but after a while you’ll feel, well, responsible. If your ego just can’t bear breaking out the ledger in the checkout line, put all of your receipts in a specific place in your wallet and balance your ledger as soon as you get home. After a month of tracking, add up all of the money you spent. Include the grocery bill and that pair of jeans you bought at the Gap that you didn’t really need but were on sale. Add it all up, and then determine what you really needed to spend money on (the groceries) versus what you just wanted to spend money on (the jeans). The money that you really needed to spend will become the money you depost in your personal checking account.
For the sake of this exercise, let’s say that the total you need to spend on food and fun is $1,700 a month
Principle #4- Save first
Because Brian and I know how much we make and how much we spend, we know how much we can reasonably save each month. As soon as our paychecks are direct deposited into our account, the first thing we do is transfer money into savings. After that, we put our bill money into our bill account and our spending money into our personal checking accounts. I’ve written about the way we divide our money into accounts in a previous post.
Putting it into action: You now know how much you make ($5835) and spend ($2250 + $1700) each month. Subtract the total amount of money you spend from the total you make and you’ll get the total amount of money you can save ($1885). As soon as you are paid, put that money directly into your savings account. Don’t think twice about it and don’t touch it.
Principle #5- Save often
What’s the difference between saving first and saving often? When you save first, you automatically put the money aside. When you save often, you find tiny bits of money to sock away. For example, if grandma sends me a $50 check for my birthday, it goes into savings. If I have $20 left over in my personal checking account when the next paycheck rolls around, I put that $20 in savings. Saving small amounts of money as often as possible adds up to a lot of money over time. For proof, look no further than the change jar.
Putting it into action: Keep your eyes open for opportunities to save money often. Resist the urge to spend that 20 extra bucks on a new knick knack for your kitchen. Remember that nothing feels as good as watching your savings goal grow. It means you’re closer to reaching your dream.
Principle #6- Don’t use credit cards
I know some people will say this is bad advice but Brian and I each have one credit card and we rarely use them. As a rule, we’ll charge a bag of dog food about once every three months just to maintain a good credit history. We’ll then pay the card off at the end of the month.
One thing that really helped us get rid of our credit card debt was to continue to save even while we were paying off the cards. By saving some money instead of putting it all towards our cards, we had a backup supply of cash in case there was an emergency. For example, our computer died and we had to buy another one. Instead of charging it (which we normally would have done), we paid with money we’d saved. This kept us from wrecking all the effort we’d made on paying our cards down.
Putting it into action: Determine how much you owe on your credit cards. If you have more than one card, figure out which has the highest interest rates and put your efforts towards paying this card down first.
Principle #7- Know your reasons
We saved a lot of money for our wedding, then to fix up our house, and now we are saving a lot of money for our trip. It’s easier for us to live frugally and save a lot of money when we have a clear idea of what we’re saving for.
Putting it into action: Sit down and write your dreams down on paper. What do you really want to do and how much will it cost you to do it? Do you want to hike the Appalachian Trail or adopt a baby or travel the world? Maybe you want to start a nonprofit or take your mom on vacation. Whatever it is, write it down. Think about it each time you spend money. Ask yourself, is buying this gadget more important than saving for my dream?
Review the exercise
Your total monthly income after taxes was $5,835
Your total monthly bills are $2,250
Your monthly food and fun expenses are $1,700
That leaves $1,885 each month to put in your savings account.
In one year you can save $22,620!
Seriously. When you know what you’re bringing in and where it’s going, you’ll finally have control over how you use it. Use it to fund your dream!