Personal Budgeting: Keep More Cash

Time To Read 3 MIN READ

Congratulations! You have kept the U.S. economy afloat by opening up your wallet for everything from cars to candy bars.

But if stuffing cash into the nation's economic cracks has swollen your credit card balances or depleted your savings, it may be time to turn your attention to your own economic stability.

Frivolous spending may not be the problem. Maybe it's higher energy bills or a new expense, such as college tuition. Maybe it's less income or fewer withdrawals from your battered brokerage account. Whatever the reason, growing debt and shrinking savings are warning signs that you have a leaky budget. Locate and plug the leaks and you'll have that much more to sock away for retirement, college savings, a house or a new car—or to pay off debt.

Step 1: Review your spending plan

Yes, we're about to use the B-word. But don't think of a budget as a straitjacket. Think of it more as a spending plan to help you track where your dollars are going, and reach the savings goals you have already established.

If you've never created a budget, see Build Your Budget for more on making the process as painless as possible.

If you already have a budget, take a few minutes to review your spending estimates. Get out your calculator and your check registry, or log in to your personal finance software to see if your fixed expenditures (rent, mortgage and loan payments, insurance premiums, etc.) and variable expenses (utility bills, groceries, clothing and transportation) are still in line with your expectations. Update your budget as needed.

Step 2: Track your impulse spending

Getting a handle on miscellaneous spending takes more discipline. The best way to get an accurate estimate is to track your spending for two or three weeks. List your purchases throughout the day, every day, in a small notebook or your PDA.

Tracking every item you buy is one of the best ways to spot leaks that spring from impulse spending. Writing it down may even save you money if it causes you to think twice before you buy.

Step 3: Plug the leaks

Unless you're an OPEC minister, there isn't much you can do about higher fuel prices or utility costs. But there is plenty you can do to minimize the bills you pay. Here are just a few ideas:

Save energy. Deregulation in some states has allowed electric and natural gas suppliers to compete for your business. Energy Finder can help you identify new and possibly less expensive sources of energy near you.

A more energy-efficient home can also help. The Energyguide Home Analyzer helps you examine your energy usage and suggest products or improvements to lower your bills.

Reduce your mortgage rate. Take advantage of lower interest rates by refinancing your mortgage. Even small differences in interest rates can add up over time, especially on larger loans. On a $250,000 30-year mortgage, for example, the difference between 7 percent and 5.5 percent could cut your mortgage payment by nearly $250 a month.

Pay off or consolidate debt. The average fixed-rate credit card charges about 14.5 percent interest. If you're paying hefty rates, look for a card with a lower interest rate, or a home equity loan.

The best option, of course, is to pay off your debt. Imagine how far ahead you’d be if the money you’re now paying in interest were added to your savings each month.

If you choose to consolidate your debts with a home equity loan, you'd cut your interest expense almost in half. Plus, you can usually deduct that interest on your tax return for even greater savings.