Trim the fat: 5 rules for putting your budget on a diet
“When it comes to saving money, going on a financial diet is similar to losing weight,” explains Edward Seibert, who teaches tax and accounting courses in both the undergraduate and MBA programs for University of Phoenix. “The key to any diet is getting into a really good set of habits to set yourself up for success.” Here are a few dietary restrictions that will pay off at the bank:
Pay yourself first.
“A general rule of thumb for any working person is to start off by first paying yourself at least 10 percent of what you earn each month,” says Seibert, who advises teachers about finances in his role as chief financial officer for a school district in Delaware. Put your savings into a retirement account or a 401(k) — or, if you’ll need the money in the near future, into a savings account.
“If you don’t put yourself first, I assure you no one else will,” he explains.
Evaluate your spending habits.
It’s important to go through your monthly expenses and separate the needs from the wants, Seibert says. “Wants are things that are nice to have but that you could easily do without.” If you are buying a $4 latté and a $2 muffin every day, for instance, that’s $180 that could be easily trimmed from your budget each month. Write down what you spend all month and notice what expensive little habits are eating away at your wallet.
Reduce your optional expenses.
Fixed costs are the bills you pay each month, such as housing, child care, utilities and car payments. Seibert suggests taking a hard look at your basic needs and trading down on non-essentials, such as getting rid of your landline if you have a cellphone or limiting your cable plan. With so much free video streaming online, he suggests asking yourself, “Do I really need the premium package?”
Cut up credit cards.
“It’s a known fact that people who use credit cards to pay for items wind up spending more money than those who pay with cash or debit cards,” Seibert says. Making only minimum monthly payments on cards is a recipe for bankruptcy, he adds. Instead, cut up your credit cards and make the largest payments you can afford going forward to reduce finance charges.
Make big decisions that fit your budget.
When making large purchases, such as a home, it’s important to make a choice that aligns with your budget. “As a general rule, when buying a house or renting an apartment, people should be spending no more than 28 percent on their housing costs and utilities combined,” Seibert says. “If you can’t afford to live in an area, don't live there.”