How To Stop Spending And Start Saving

A new year is a time for resolution and making life changes. For many in 2011, saving money is high on the list of priorities. But how, exactly, can you save money if you are living paycheck to paycheck?

The simple answer is to “live below your means.” While it’s easy to live “above” your means -- that’s how we got into this mess in the first place -- living “below” takes some getting used to.

The result, however, will be the accumulation of cash. When you think about it, this is what successful businesses do. They know how much money is coming in and they spend less than they make. For businesses, what’s left over is called a profit. For consumers, it’s savings.

But let’s assume you are spending everything you earn each month. Where will the savings come from?

Earn more, spend less

Two places. You can increase your income or cut your expenses. Or, preferably, both.

Assuming your boss is not going to give you a raise, you might need to consider taking a part-time job in addition to your full-time employment. Do you have a hobby that might turn into an income stream? Does a friend need help at her business on the weekends? A little extra income can create additional cash flow for your budget. Just make sure you target that money for savings and don’t spend it!

On the spending side, make a complete list of your monthly expenses. If you are like most consumers, you’ll have some significant credit card debt. As you begin to cut spending, focus first on reducing that debt.

If you have a large balance, it might seem overwhelming but if you don’t start chipping away at the total, it will only get worse. In addition to your regular monthly payment, any extra money you earn should be used to pay off debt.

Make sacrifices

Are there assets you can sell? You might have to get along with just one car for a while. Or ride a bike! If selling assets can raise a few thousand dollars that can be used to pay off debt, do it!

The payoff for paying off debt is enormous. Many people pay hundreds of dollars or more on their credit cards each month and barely stay even. Once that debt is gone, that money you’re sending to the bank each month is yours!

While you are paying off your credit card balances, put the credit cards away. Don’t use them, except for convenience. That is, for things for which you have the money in your budget to pay for them in full. And when the bill comes in, make sure you pay for everything you charged that month, plus your debt service.

It’s very easy to lose track during the month of things you’ve purchased with a credit card, especially meals. Pay for meals and other day to day expenses with cash. Many personal finance experts also strongly urge you to write down everything you spend in a month. Reviewing that list will help you keep on top of your spending and recognize places where you can make cuts.

Whether you keep a detailed list or not, you are going to have to at least track your income and spending in your head, remaining aware of that delicate balance. Businesses call this “knowing your numbers.” Consumers need to know their numbers too.

Lifestyle changes

Living “below” your means will in all likelihood require some life changes, and if you’re serious about saving money, you have to be prepared to make them. It might mean taking your lunch instead of buying from the sandwich lady. It may mean drinking office coffee instead of Starbucks.

Go easy on the booze; if you smoke, by all means quit; watch less TV and don’t eat as much. Not only will you save money, your health might improve too.

Benjamin Franklin famously observed “a penny saved is a penny earned.” And while it’s still true, it’s not easy to get started on the road to savings, especially if you’ve never experienced delayed gratification. But for those who are serious and are willing to make sacrifices, the payoff can be money in the bank.