Sometimes people realize that their salary suddenly disappears before the end of the month. What are some tips on how can I save my money, or how can I increase my income besides my full-time job?
In a word: budgeting.
In order to have money left over at the end of the month, you need to be intentional about how you spend it. That is all a budget is: a plan for spending your money.
Few people have the discipline and abundance of income necessary to just wing it and not overspend. By making a plan at home ahead of time, you can decide how much you will spend on food, entertainment, etc, and ensure you have enough money left over for things like rent/mortgage and utility bills, and still have enough for longer-term savings goals like a car purchase or retirement.
If you don't have a plan, it's simply not reasonable to expect yourself to know if you have enough money for a Venti cup as you drive past the Starbucks. A good plan will allow you to spend on things that are important to you while ensuring that you have enough to meet your obligations and long-term goals.
Another thing a budget will do for you is highlight where your problem is. If your problem is that you are spending too much money on luxuries, the budget will show you that. It might also reveal to you that your rent is too high, or your energy consumption is too great. On the other hand, you might realize after budgeting that your spending is reasonable, but your income is too low. In that case, you should focus on spending more of your time working or looking for a better paying job.
A technique that is working pretty well for me: Hide the money from myself:
I have two bank accounts at different banks. Let's call them A and B. I asked my employer to send my salary into account A. Furthermore I have configured an automatic transfer of money from account A to account B on the first of each month.
I only use account B for all my expenses (rent, credit card, food, etc) and I check its statement quite often. Since the monthly transfer is only 80% of my salary I save money each month in account A. I don't have a credit card attached to the savings account and I almost never look at its statement.
Since that money is out of sight, I do not think much about it and I do not think that I could spend it. I know it is a cheap trick, but it works pretty well for me.
Entire books have been written on how to get to the end of the month before you get to the end of the money. It's a very broad problem. But in your case, let me point out that your salary never "suddenly disappears" (unless you're paid in cash and it blew away or was stolen while you were sleeping.) You spent it.
For a month, monitor your spending. One approach is to write everything down in a small notebook. Come up with categories like "Rent", "Food", "Transportation" and look at the totals. Over time, you can estimate what you spend in a normal week or month on these things. When you spend much more, you can ask yourself why. It might be because you just splurged money you didn't have on something you didn't need. It might be because something broke, and you hadn't been saving a small reserve month after month to pay for those repairs when they would be needed. It might be because some bills only come once a year or every 6 months, and you hadn't been saving a small reserve to pay that bill when it came in.
Once you understand where your money is going and why it sometimes runs out, you can work out what to do about that. It might involve spending less. But that's not the first step. The first step is not to be surprised by "sudden disappearances" that are anything but.
A trick that works for some folks: "Pay yourself first." Have part of your paycheck put directly into an account that you promise yourself you won't touch except for some specific purpose (eg retirement). If that money is gone before it gets to your pocket, it's much less likely to be spent.
US-specific: Note that if your employer offers a 401k program with matching funds, and you aren't taking advantage of that, you are leaving free money on the table. That does put an additional barrier between you and the money until you retire, too. (In other countries, look for other possible matching fundsand/or tax-advantaged savings programs; for that matter there are some other possibilities in the US, from education savings plans to discounted stock purchase that you could sell immediately for a profit. I probably should be signed up for that last...)
First pay yourself. When you get salary, send some parts of that (for example 10%) to your saving account.
Step by step you'll save nice money ;)
"Envelope budgeting" is pretty simple. It's easy enough that you can teach it to children, and flexible enough you can use it as an adult.
The general idea is that you take your cash money (no bank accounts involved in the simple version), and stick it in envelopes marked for what it's supposed to be for. So for example, you get paid, you cash your paycheck and you put $100 in an envelope marked food.
Now when you go out to eat, you go get the money out of your food envelope, and spend it on food.
When your food envelope is empty you go hungry.
In the simple version you have envelopes for things like "food", "candy", "toys", "games". etc. (simple version is usually taught to kids.) So you want a $60 game, and your game envelope only has $5. Well you can't get the game. You need to add more money to the game envelope. You need to eat so you have to put money there, but maybe you don't need toys. So you can divert some incoming money from toys to games. Sure it's still going to take a while to get to $60, but now with some simple kid friendly math you can see how long, and more importantly, you can make decisions on what is more important. Candy or Toys?
In the adult version things are much the same. We just have more envelopes. We have Rent, Car Payment, Gas, Food, Electric.
Then we need some envelopes for "savings" and "retirement". etc.
Now when you get your Paycheck you prioritize your money and you stuff it in the envelopes. How much you put in each envelope is easy. Enough to pay for that thing. Savings and Retirement meet different goals. You want $6,000 savings. Well just like that game in the kid version, you're not going to get there all at once. But you can see and make decisions on what is most important. You want $1,000,000 to retire on. Sure, but that envelope is going to take a while to fill up.
At it's core, the important parts are that:
- You only count money you have in hand. Not future money, or expected money of any kind.
- You only spend money from the correct envelope. Your rent envelope doesn't have enough. Then you go homeless. Thankfully your car envelope is good, so at least you can live in your car.
- You decide whats more important, WHEN PLACING MONEY IN THE ENVELOPE. The rent envelope is gonna be a bit lite, divert money from the savings envelope.
- You do not use money from one envelope to cover another. Only when you're placing money in envelopes can you decide that something is more important.
Let me explain the rent example, as it's the oddest.
You get $500 a week, and you need $1000 for rent.
- Week 1 - $500 in Rent envelope
- Week 2 - $500 in Rent envelope <- You paid your rent next month
- Week 3 - $500 in other envelopes
- Week 4 - $500 in other envelopes
This means you're spending from your envelopes. During week 1 and 2 you're spending last months week 3 and 4.
You DO NOT do:
- Week 1 - $250 in Rent envelope
- Week 2 - $250 in Rent envelope
- Week 3 - $250 in Rent envelope
- Week 4 - $250 in Rent envelope <- next months rent paid here.
This is important because if you lose your paycheck in week 3 or 4 you are homeless.
Finally, in general, you stick stuff in savings envelope. And you want to reach a savings envelope goal of 6 months of your average pay checks. Once you reach this goal, then you're in good shape, and a job loss doesn't mean you're homeless. You can always just pull from savings.
It's important when using these envelopes to understand that you only make the decision of what is more important when you're sticking money in, not when you're taking money out, and that you only work with the money you have right now today (in your hand). Now what you think you're going to get tomorrow.
Money in the bank can be split into virtual envelopes. Money in savings can be in any vehicle, but generally you want a short term emergency envelope (savings account) and a long term envelope (CDs for example).
Take a look at YNAB.com they used to provide free lessons in using their software to manage an envelope system.
And the I know it's going to get comments section.
The rent v.s. homeless is a real example. You should not take money from, say, the food envelope, to cover the rent. This may seem silly, but if you're doing that then you made poor decisions when deciding where the money goes. Use the emergency fund envelope to cover the rent, and next time put less money into food. It's this "rule" that makes envelope budgeting work well. You may be homeless, but you can eat, drive to work, put gas in your car, and pay your bills. Taking money from different envelopes usually results in a spiral, where you attempt to do the sensible thing, but in the end, you're worse off.
Migrating to envelope budgeting (in the strict sense) is hard. The best way I have taught people to do it is to only envelope budget an increasing part of their income until their envelopes are full enough for one month. That means that you might only envelope budget 10% of your income at first. But unless your situation is such that you can cover all your bills with one paycheck, it's not going to be possible to transition without breaking the "don't take money from other envelope" rules.