What are your plans for your retirement years? According to the 2022 Transamerica Retirement Survey, the top two retirement goals are “traveling” and “spending more time with family and friends.” But to reach those goals, you’ll need to know how to plan for saving money.
Unfortunately, over half (55%) of Americans admit they’re behind in their retirement savings. According to a survey from Bankrate, more than a third (35%) claim to be “significantly behind.” If this sounds familiar, don’t panic.
The following tips can help you learn how to plan for saving money every month.
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Figure Out How Much Money You Need to Live Each Month
Start by calculating your personal cost of living. To do so, you’ll need to add up your fixed, variable, and discretionary expenses.
Fixed Expenses
Fixed expenses are necessary costs that don’t change from month to month. Common examples of fixed expenses are:
- Rent or mortgage
- Car payments
- Phone/cable bills
- Insurance premiums
- Property taxes
- Student loans or other debt payments
Don’t factor in your savings just yet. Right now, you’re seeking to determine the amount of money you absolutely need each month, and that starts with these fixed costs.
Variable Expenses
Variable expenses are also necessary, but their amounts can vary from month to month. These include such expenses as:
- Groceries
- Utility bills
- Gas
- Clothing
- Credit card bills
Remember that these are running averages and can peak during certain times of the year. You might consider adding up your utility bills from the last year and then dividing the total by 12 to calculate your monthly average.
Discretionary Expenses
Finally, you’ll need to account for discretionary expenses. These are the purchases you choose to make, such as:
- Meals/coffee out
- Entertainment
- Streaming subscriptions
- Hobbies and sports
- Gym memberships
If you’re unsure where to start, look at your bank statements from the past three months (or more). This will give you an idea of where your money is going, and you can use the information as a foundation when learning how to plan for saving money.
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Create a Budget that Allocates Money for Necessary Expenses, Savings, and Discretionary Spending
Once you determine the amount of money you need each month, you can create a budget that meets these needs while leaving room for savings.
Start by allocating money toward your fixed costs. Since these expenses remain constant, they make it easier to plan your overall budget. Next, divert money toward your variable and discretionary expenses.
Remember that you’re not trying to allocate your total monthly income but only enough to cover what you’ll need from each category. This will ensure you have enough left over to put toward your savings.
If you’ve adequately budgeted, you should have enough remaining money to build your savings. Start by ensuring that you have a short-term savings account. Having enough money on hand to cover three to six months of expenses can prevent you from tapping into your long-term savings if an emergency arises.
Once your short-term savings are built, you can start working on your long-term savings account. Don’t worry if you don’t have enough to put in savings at present. Even small amounts can accumulate over time. Remember that you may have more to set aside once you pay off your car loan, student debt, and other time-limited bills.
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Make Adjustments as Needed to Ensure You’re on Track to Meet Your Goals
To learn how to plan for saving money, you’ll need to prepare yourself for something of a reality check. First, compare the budget you’ve created to how much you’ve actually been spending each month. It could be that your current spending habits are not in line with your financial goals.
If that’s the case, don’t panic. Now is the time to align your personal spending habits with your long-term goals. You probably won’t be able to eliminate needed expenses, but the following suggestions can help you trim your variable and discretionary expenses:
- Cut back on gourmet coffee or dining out
- Eliminate one or more streaming services
- Cancel unused subscription services
- Buy store-brand products
- Use coupons to purchase groceries
- Adjust your thermostat to lower utility bills
Admittedly, these changes can take some time to get used to. So make a game of it. Challenge yourself to eliminate one takeout meal or gourmet coffee next week. Then, the week after, challenge yourself to eliminate another discretionary purchase.
Before you know it, you’ll meet your desired budget, and you’ll have plenty of room to save for the future.
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Automate Your Finances, So You’re Not Tempted to Spend More Than You Have Allocated
Knowing how to plan for saving money is the easy part. The hard part is sticking to your budget. But you can make it easier by automating your finances.
Many consumers already rely on automated bill payments to cover recurring expenses. But some banks let you take this a step further by automatically transferring money between your checking and savings accounts.
For example, you could set up an automated transfer that ensures you set aside money for monthly savings. This means you won’t be tempted to spend before you have a chance to save.
Just be careful with automated payments. It’s easy to lose track of which companies can access your payment details. It’s too easy to sign up for automated services only to have the company raise the price later. This can derail your budget and even cause an overdraft if you’re not careful.
Otherwise, keeping tabs on your automated payments can be a convenient way to stay on track and even build your credit by making consistent on-time bill payments.
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Make a Plan to Pay Off Any High-Interest Debt
While most of the adjustments you make to your budget will focus on variable costs and discretionary purchases, you can also cut back on certain fixed expenses.
Many of these costs come from high-interest debt such as credit card bills, student loans, or car payments. You can free up some room in your budget by eliminating these expenses as soon as possible. Here are two common strategies for doing so.
The Snowball Method
Start by paying off your smallest debt first. Then, once you eliminate this debt, apply the amount you were paying to your next-highest debt. The goal is to allow your payments to “snowball” until you’ve eliminated all smaller debt and you can now afford to make more significant progress on your larger debt elimination.
The Avalanche Method
The avalanche method works in reverse. Start by paying off your largest bills (or loans with the highest interest rates), then work your way down to your smaller bills. This will help you cut out your largest bills as quickly as possible. Just be aware that since some debts can be pretty high (student loans, for example), eliminating these expenses may take a while.
Caution: Watch Out for Prepayment Fees
While eliminating credit card debt is a wise choice, not all of your debts can be paid off so easily. For example, some mortgages and car loans have prepayment penalties that will charge you money if you attempt to pay off your debt too early. So check to ensure that paying off your debts won’t result in added charges. Discipline your spending, buy only what you need, and avoid impulse buys.
Keep a tight rein on your wallet. It’s easy to get carried away and buy more than what you need. So instead, stick to the essentials, and avoid impulse purchases that can derail your budget.
Easier said than done? When learning how to plan to save money, you’ll need to develop some discipline in your purchases. Here are some workable strategies.
Stick to a Grocery List
Before you go grocery shopping, make a list of your essentials. This prevents you from making snap decisions or being influenced by store displays once you’re there. Eat before you go to the grocery store so that you aren’t hungry — hunger can overcome your good senses.
Give Yourself Time to Think About It
Impulse decisions happen quickly. Discipline yourself to think about your spending before making the purchase. When shopping, put the item down and return to it before you leave. Or leave the item in your online shopping cart until you can determine how it fits your budget.
If, after this pause, you decide you genuinely need the item, then you can complete the transaction.
Pay for Discretionary Purchases in Cash
Pay for your significant bills using automated bill pay, but complete your discretionary purchases with cash. That way, you will always have a limited amount of money to draw from and can make buying decisions accordingly.
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Celebrate Small Victories Along the Way as You Work Toward Your Financial Goals
Your retirement years are basically a lifetime away. That’s why it helps to set solid benchmarks to track your progress.
For example, you might make it a goal to set aside 15% of your monthly income toward your retirement goal. Or you could make it a goal to set aside a year’s salary for your retirement by your 30th birthday.
Setting a series of short-term goals can help you track your progress toward retirement and give you a sense of accomplishment along the way.
Knowing how to plan for saving money can also be your whole family’s responsibility. If the family shares progress updates, you can celebrate the accomplishments together. Depending on their ages, your children might not be enthused about your retirement progress, but sharing these victories can help them learn the importance of long-term planning.
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Review Your Budget Regularly to Make Sure it Still Meets Your Needs
Your financial circumstances change all the time. Your budget should do the same. Make a plan to review your budget at least once per year. This can help you make adjustments as you pay off debts or have more revenue to draw from.
Reviewing your budget is especially important during periods of inflation. For example, higher prices at the grocery store and the gas pump may prompt you to adjust your variable expenses. In addition, you may need to reevaluate your regular expenses to ensure you’re still able to allocate money to your savings.
You may find more income as you advance in your career. Raises at work will allow you to devote even more to your retirement savings or give you a bit more breathing room when it comes to dining out or entertainment.
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Changing Your Approach to Retirement
Now that you know how to plan for saving money each month, it’s time to put your knowledge into action. Due can help. At Due, we believe in helping our customers strategize and reach their retirement goals. We also offer an annuity that can provide a stable income during retirement.
So no matter where you are in your financial journey, Due can help you. To learn more, contact Due today.
Article by John Boitnott, Due
About the Author
John Boitnott graduated from UC Santa Barbara with a Masters Degree in Education. He worked for 14 years as a broadcast news writer for ABC, NBC, and CBS News where he covered finance, business and real estate. He covered financial news for SAP for four years. Boitnott is now working as a columnist for The Motley Fool where he covers personal financial and investing strategies.
