Excerpted from “Good Ways to Get Started Cutting Back” and “7 Tips on Putting Your Dollars to Work...for You!” Winter 2008/2009.
If you or others in your family are facing difficult times financially, perhaps from a job loss or wage cuts, it is especially important to spend less on nonessential items so you have more money to pay essential bills or to add to a savings account you can tap in an emergency. Here are some strategies.
Take a serious look at your spending. As a first step, think about creating a budget. Make a list of your monthly expenses divided into two groups — your “needs” (expenses that are absolutely necessary, such as your housing, utilities, clothes, food and transportation) and your “wants” (optional purchases). After you differentiate between spending for needs and splurging on wants, cut back on the second category, especially if you're already suffering an income loss or other financial hardship. Possible places to cut back include restaurant meals, monthly subscriptions and premium TV channels.
Keep banking costs down. Among the possibilities: If you routinely pay bank fees, shop for a different account that meets your needs at a lower cost. Also review your banking habits to cut unnecessary fees. With your credit card bill, pay as much as you can, as soon as you can. It will mean you'll pay less interest and avoid late fees. And if you have a mortgage and you expect to continue to own your home for the foreseeable future, see if you can save money by refinancing to get a lower interest rate and a lower monthly payment, after weighing the up-front costs of refinancing.
Have an emergency savings account. This is an account you can tap if you lose your job or have major, unforeseen expenses. Emergency savings will help ensure that you don't have to borrow from your retirement nest egg or take out additional loans that would push you into debt. A general rule of thumb is to have enough money in this “rainy day” fund equal to at least two months of living expenses. If your employment outlook is especially uncertain, consider setting aside enough to cover six or more months of anticipated expenses. Also, keep your emergency savings in an account that will be fairly liquid — such as a bank savings account, money market account or a short-term certificate of deposit (CD) — so you can withdraw the money relatively quickly, if necessary.
Try to save money for long-term goals, such as your retirement. If your employer matches a portion of your payroll contributions to a tax-advantaged retirement savings plan, not participating means you are passing up free money and perhaps losing out on a valuable tax break. Even if your employer does not match, you should still take advantage of these accounts.
Pay yourself first. That means each month, before you're tempted to spend money, commit to putting a good bit of it into a savings account. You can write out a check to be deposited into your savings account, but it's much easier to arrange with your bank to automatically transfer a certain amount from your paycheck or your checking account into savings.
Review your existing accounts and comparison shop for the best deals. Look at what is being offered by your bank and a few competitors. The idea is to make sure the interest rates are competitive and that the fees and features are appropriate for how you use each account.
Turn a debt payment into a deposit. If you pay off a debt, such as the outstanding balance on a credit card, or if you make that last loan payment on your car, put that money to work as part of your savings.
Save, don't spend, a financial “windfall.” If you receive a large sum — perhaps from an inheritance, an insurance payment, a tax refund or a bonus at work — deposit that money into a savings or investment account before you're tempted to spend it.