November 09, 2009

Five Painless Ways to Cut Your Budget

Making Life Better

Give yourself a personal-finance makeover with this easy-to-follow plan.

From nervous penny-pinching to cathartic impulse spending, the decisions we make at the cash register are based more on our emotional state than on the state of our finances. Here, a five-step plan to organize your finances and help you make rational choices.

Follow the bucks. Getting a handle on your household spending habits starts with figuring out where your dough goes. Free online budgeting tools such as and give you an instant three-month snapshot of your household cash flow when you export your bank and credit-card transactions from the past 90 days.

Identify your biggest budget-busters. Don’t get mired in tracking the details of every dime you spend. Instead, sweat the big stuff, by honing in on the priciest three to seven spending categories. Those tend to be food, transportation, housing, entertainment-related costs and infrequent but large expenditures, such as insurance premiums, medical care and taxes.

Set your new spending limits. Now that you know how much goes out every month, it's time to rein your expenses in. Set new spending targets for three to seven of the major categories you’ve identified. Base your cuts on either a dollar amount you’d like to save each month or on a percentage (for example, 15% less than what you typically shell out in a month). Divide those monthly numbers by four to set your weekly spending limits for each category of expenditure.

Give yourself an allowance. A simple, but highly effective, cost-cutting tactic is to physically limit your splurging power: Label individual envelopes with everyday spending categories (for example, “coffee/lunch/snack money”) and stuff them with a week’s worth of cash. The amount you put in each envelope represents your new spending limit. (You can also do this on a daily basis if you don’t want to carry too much money at one time.) Leave the credit (and debit!) cards at home, or at least promise yourself that you will use them only for actual emergencies. Why does this work? The visual reminder of the actual cash you have left to spend is a powerful one, requiring you to assess the damage you're going to do before you get to the checkout counter.

This trick works wonders. Consider how much you could save on food alone: The average American family spends 12.3% of its money on food-both at home and in restaurants-according to the Bureau of Labor Statistics’ Consumer Expenditure Survey. Cut back by 15%, and you’ll save more than $900 in savings in one year.

Set a date to do some savings homework. Mark your calendar with a formal “Save Money” date. Use this time to research ways to cut your car and homeowner's insurance premiums and to review your health coverage for ways to save (such as filling your prescriptions by mail.) Also, spend a few minutes of that time to get your tax refund right now by cutting off the free loan you're giving Uncle Sam. (Last year the average tax refund was around $2,300.) If you got a refund last year, use the withholding calculator to see if you should increase the number of exemptions you claim.

Cutting your budget to save more money for college? Cozi is offering the chance to win $529 for your child's college savings plan!

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Could not agree with this more. You have to be very intentional about watching where you spend, monitoring activity and sticking to a budget. It's actually a good way to get the family involved in solving the problem. My 12 and 8 year olds are now asking "how does that effect our budget" when we go to spend something. Good stuff.

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