We work hard to make our money and sometimes complain about how we don’t make enough money. However, how many of us can hold up our hands and say that we never waste money? Indeed, the truth is that most of us, at some point or other, have drifted through life not really focused upon concepts such as budgeting, living within our means, or getting value for money. The result is often that we have much less money available to deposit into savings accounts or investment instruments. If this description fits your experience then it’s time to look at how to stop wasting money so that you can build your savings.
Understand how much you are spending:
It’s an obvious point but you can’t improve your finances without first confronting the truth of how much you currently spend. The easiest way to do this is to review 3 months’ worth of bank statements, although you could also keep a spend diary to achieve the same goal.
Tip: You can subtract your total monthly costs from your monthly income to derive your disposable monthly income. This is the money that’s readily available to put towards savings accounts.
Work out what you are spending your money on:
As well as knowing your total spend, you also need to identify what you are spending your money on. This is done by going through your monthly purchases and assigning each of them to spend categories such as “groceries”, “entertainment”, and “commuting”. Another useful exercise is to view your list of regular standing orders and direct debits to see who you are regularly making payments to. This can usually easily be done via your bank’s online banking service.
Identify easy ways to reduce your costs:
Seeing where your money is going may prove illuminating and may give you some immediate ideas on how you can trim your expenditure. Some common examples of costs that can often be cut include costs relating to:
Eating out / junk food Groceries (e.g. by switching to lower cost supermarkets) Gym or sports club memberships (if you aren’t making use of them) Commuting (consider car share or cycling as alternatives to being a sole driver) Smoking, gambling and drinking (activities which are often unhealthy and bad for our wallet) Books, CDs, and DVDs (these can often be obtained from libraries or second hand stores rather than paying full price) Utility bills (people can often realize substantial savings by switching to lower cost providers of services such as electricity, gas, Internet, and telephone) Mortgage (switching to a mortgage deal that’s even 0.5% cheaper may deliver a big cost saving if you have a big mortgage) Insurance (shopping around may deliver big cost savings on car insurance, home insurance, etc)
These are just a few examples of types of spending that often are ripe for achieving cost savings. However, there are countless spend items that you may be able to trim and they will differ from person to person.
Work to budget targets:
I’ve already highlighted the building blocks of having a budget, namely to review your spending and identify cost savings. However, budgeting also involves setting targets on how much you are going to spend, and how much you are going to put into savings accounts, on an ongoing basis. Having targets will help to focus your mind on what financial goals you want and need to achieve and will make it much more likely that you will deliver life-changing improvements.
Pay off (or reduce) existing debt and don’t take any more debt on:
Paying interest (and sometimes bank fees) on credit cards, overdrafts, and personal loans is a great drain on a person’s finances. It’s particularly nasty where a person fails to pay off their credit card in full at the end of a month and ends up paying interest on interest! Make sure you do all you can to pay off such debt, or at least to reduce the outstanding capital amount, and then don’t take on any new debt.
Pay yourself on pay day:
Agree the amount of money you intend to put into your savings account and transfer it across from your checking account on pay day. This removes the temptation to spend that earmarked money that might have existed had it stayed in your checking account until the end of the month.
Monitor spending and don’t become complacent:
The final part of the jigsaw is to keep monitoring how much you are spending and what you are spending it on. This will help you to avoid creeping back to bad habits and will ensure that you continue to improve the state of your finances.