Figuring out how to save money on a tight budget is a challenge many of us face. We know we should save, but we don’t know where to find the money to do so. Then the washing machine starts pouring water from the bottom, or the car starts making an awful noise, and we don’t have the money for repairs.
If you’ve found yourself in that position, you’re not alone: a recent study revealed that 63% of Americans can’t cover unexpected expenses. While some could turn to their savings for part of the money, 29% of us have no savings whatsoever.
Not having the money to pay for bills is terrifying, especially when you’re a parent. As a widow, I’m now the sole source of support for my son, and that makes having adequate savings imperative: if for some reason I became unable to work we would both be ruined.
I’ve made saving money my Number One priority over the past year, and in the process, I’ve learned a few things about how to save money on a tight budget. Here are the things I’ve done in the past twelve months to build up my savings.
9 Steps to Save Money on a Tight Budget
1. Save a percentage of income, not a fixed monthly amount.
The general advice is to save enough to cover 3 to 6 months’ of your family’s expenses. Financial expert Dave Ramsey says that for most of us that will be between $10,000 and $15,000. Ramsey recommends building that buffer as quickly as possible, which would involve socking away $1,250 per month. But for some of us, that amount isn’t feasible.
Another approach involves saving 25% of your income every month to build your 3-month buffer over the course of a year, then continue to make a 6-month buffer. For a family earning $3,500/mo. that means saving $875 per month, an amount that may still sound ambitious. It’s not, but it does take some serious measures.
2. Automate and prioritize your savings.
We’ve all heard the advice to “pay yourself first” but most people get that part incredibly wrong. To pay yourself first does not mean portioning out your entertainment expenses and giving yourself an allowance for hair or mani/pedi appointments.
J.D. Roth explains at Get Rich Slowly:
To pay yourself first means simply this: Before you pay your bills, before you buy groceries or do anything else, set aside a portion of your income to save.
The easiest way to do this is by automating your savings so on payday 25% of your paycheck is automatically transferred out of your checking account. If your bank allows customization of the login screen, hide your savings account, so you don’t see it when you log on — that way you won’t think about touching your savings if money starts getting low before your next paycheck.
For those with variable incomes, automatic transfers aren’t always feasible. Instead, you need to make it a habit of manually moving 25% every time you get paid.
3. Anticipate the need to replenish your savings.
Having enough money to cover three months’ expenses is just your first goal. It’s called an “emergency fund” for a reason: that’s money you’ll need to cover unexpected expenses… after which you’ll need to replenish it.
Washing machine died, and the repairman couldn’t fix it? Tap your emergency fund to buy a new one, rather than use a credit card, but rebuild your emergency fund every time you tap into it.
4. Adjust your attitude.
For some people, saving money is a miserable experience. In the pursuit of savings, they feel like they’re missing out on concerts, travel, new clothes, cars, whatever. Passing up opportunities makes them feel deprived and resentful.
For others, saving money is the result of a strategic spending plan: they see money not spent today as a means to buy a prosperous future. To them, being careful about their spending is empowering.
It’s all a matter of attitude, but those who choose to view careful spending as a miserable experience are unlikely to stick with it.
5. Get the kids on board.
Many parents dislike the idea of telling their kids the family needs to cut back spending. Some fear their children will feel insecure and begin worrying about losing the house or not having enough food to eat. Others want their kids never to wonder whether Mom and Dad can afford whatever they want. Both of these parental concerns are taking the matter to the extreme.
A fact of life is that people only make so much money, and if you spend more than you have bad things will happen. Telling your children that you’re taking steps to ensure you don’t spend more than you have demonstrates financial responsibility. That’s an important thing for kids to see since parents’ spending habits influence their children financial health later in life.
Getting the kids on board with your family’s spending and saving plan will also significantly reduce your stress. Pleas for a $50 pizza and movie night out can be painlessly silenced by pointing out how you’ll save $35 making pizza at home and watching Netflix. If your kids don’t understand why you’re watching your spending they aren’t going to cut back on demands you buy stuff.
6. Reduce non-discretionary expenses as you can.
Because they cover the things we truly need, most non-discretionary expenses are fixed: the mortgage or rent, health insurance premiums, car payments, etc. are all set amounts each month. While it may be worth looking into refinancing or comparison shopping on these things, it doesn’t always lead to huge monthly savings.
There are some non-discretionary expenses you can reduce: save on your heating costs during the winter or cooling costs during the summer. Use less water. Drive less, and group errands when you do leave the house.
Realize, though, that the majority of your savings will come from cutting discretionary expenses.
7. Identify discretionary expenses.
By definition, discretionary expenses are things we choose to have but don’t necessarily need. If non-discretionary expenses are “living expenses” that reflect what we need to survive, discretionary expenses are “lifestyle expenses” — things we don’t need but find desirable.
Some costs in this category are obvious: dining out; that latte you get every morning after taking the kids to school; the booster pack for Candy Crush because you just couldn’t bear the thought of repeating level 181 again. It’s easy to identify these as areas to cut back on, if not eliminate.
Less obvious — but often more financially significant — are the expenses involved with upgraded choices. Getting your hair colored or nails done at the salon rather than doing them at home increases this monthly discretionary spending from $15 to $80 or more. Buying a new book for $11.99 rather than borrowing from the library (free) is another.
What about that $40/month gym membership so you can run on a treadmill rather than the sidewalk ($0)? The afternoon vending machine bag of chips ($1.25) instead of a bag brought from home ($0.40) adds up over the course of a week ($6.25 vs. $2… or $25 vs. $8 per month). Cable or satellite TV, even without premium channels, runs at least $80 per month… but you can get an HDTV antenna for local channels for a one-time cost of $29 and subscribe to Netflix for just $11 per month — a change that will save you over $800 in a year.
And while buying groceries is non-discretionary, buying them without using coupons makes no sense when you’re trying to save money on a tight budget — they can make the difference between a $120 trip and a $80 trip. Which would you rather pay?
Be ruthless about identifying your discretionary expenses, along with lifestyle upgrades, and you will dramatically increase how much money you’ve got left at the end of every pay period. While no one is saying you have to give them up forever, cut them out until you’ve got a savings cushion built up.
8. Save any “found” money.
Transferring extra money at the end of a pay period from your spending to your savings account will grow your buffer quickly. So will depositing any “found” money, which consists of unexpected income.
Your bank can help with this. Some offer “savings booster” plans that sweep from earned interest on your checking account or ATM fee refunds into your savings. If your bank offers this service, set it and forget it. You’ll be increasing your savings painlessly.
Otherwise, “found money” includes any income you don’t regularly count on. Got a bonus at work? Put it straight into savings. Did your 93-year-old Uncle Fester just leave you $500 when he passed away? Save it! This category also includes money earned from garage sales, which are an excellent way to get rid of junk while making some cash.
9. Earn your splurges.
Very few of us have the willpower and self-discipline to be 100% compliant with our savings and spending plans 100% of the time. It’s important to know this so you don’t beat yourself up for deviations — or decide that because you’ve gone off-plan once or twice it’s proof you can’t possibly do it.
Just as many successful dieters plan a weekly “cheat day” to make the other 6 days of the week bearable, you may need a splurge now and then. A “splurge” in this case doesn’t involve a massive shopping spree or new car any more than a dieting “cheat day” means eating an entire pizza followed by a gallon of ice cream. In both cases, the splurge would wipe out any progress made!
So do plan modest splurges once or twice a month, but tell yourself to earn them by staying on-plan the other times. If your kids are balking at the changes to your spending, consider making those splurges a family event: maybe dinner at home followed by a night at the movies, or a family trip to the bowling alley?
Knowing the splurge needs to be earned lets you dangle the carrot, rather than wielding the stick, so you don’t feel like you’re the only one trying to be financially responsible.
Then… keep saving!
Once you’ve amassed your 3-month buffer, don’t go back to your old ways of spending. It’s perfectly okay to lighten up a bit, but why not save six months’ expenses to create even more breathing room?
Then it’s time to start thinking about long-term saving: IRAs or Roth IRAs, a 529 plan for your kids’ college education, a diversified investment account — it all sounds like a lot, but you’ll be amazed at how much less stress your daily life has when you’ve got your future covered.