"I'm having a hard time saving money. I have a savings account but can't seem to keep money in it. HELP!"
This cry for help seems to be coming from more and more Americans with the national savings rate of negative one half of one percent. Families and individuals alike are spending more than they are earning every year and learning poor consumer habits along the way. There are many ways to budget and save but I have found that the simple allowance plan from my youth works fine to build a cash reserve and learn discretion as well.
The basic concept of the allowance system stems from the flaws of using a budget. The first step in budget construction is to identify both fixed and variable expenses, but why do we need to have variable expenses? The fact that we allow ourselves to have variation with our spending is the very reason that people have a hard time saving in the first place. Using an allowance will fix your variable expenses by putting a livable amount of money in your pocket each week that you can spend down to zero. Just like the allowance system you had as a youngster, there will be times when you want more money to buy the next great toy (ironically this has not changed much for me) but you foolishly spent your money at the arcade earlier in the week. Your only option at this point is to visit the bank of Mom and Dad or fire up the lawn mower and earn a buck (...seems this has not changed much either). With the adult version of the allowance you will learn to prioritize your spending and learn to plan and save for irregular purchases.
Determine your monthly budget
Make a list of all the expenses that you know stay about the same amount every month. This will include your mortgage/rent, car payments, insurance, etc., if you are married just create a list of expenses that you will both agree to "share," i.e. gas, groceries, anything child related, but don't include too much into this list and make sure you both agree. Then think of all the things that you purchase during an average week (lunch at work, movies, bar...) and think about how much you can survive on each week then add a little extra for buffer. Add the two amounts up and subtract from your monthly income to find out how much you could potentially save every month. An example of this might be;
- Fixed (shared expenses) 2,500
- Allowance 433 (based on $100 per week (100 x 52)/12)
- Monthly income 3,933
- Potential monthly savings 1,000
Set up your system
If you are single this is easy to do, simply open up another checking account at your bank and arrange to have your allowance sent directly to it each week. Use this checking account for all your weekly wantings. Imagine starting every Monday will $100 to spend on anything you need to get you through the week. Sounds pretty easy until your buddies at work remind you that it's taco tuesday and it's your turn to drive. That $100 goes fairly quickly if you are not careful. With your primary account (the one where you have your pay check deposited) pay all your fixed (shared) expenses. It's fairly easy to set up an online bill pay system, or use the old check book. If you co-mingle your assets this becomes a bit more cumbersome in that you will need to have a primary account (where both of your pay checks are deposited) and you will each need a checking account. All of your accounts will need to be joint ownership for you to transfer money between them.
Watch your savings grow
Theoretically if you make more than you spend every month and spend only whats in your allowance account then your primary account balance should grow larger every month. Of course we live in the real world where the unexpected happens (if the unexpected always happens, why do we still call it the unexpected?) and when it does it often has financial consequences. Just like anything there is a learning curve which you will need to scale before this system produces sustainable results. To help you along I would suggest padding your allowance account with some seed money to prevent bounced checks and running out of food on a Wednesday. If you learn to live within your allowance you learn one of the great truths about money, it's not about how much you make, it's about how much you spend.
