Posted on: 17-02-2015 in Financial Planning
You know you should be saving for retirement, but it is easier said than done when your income is low. Is there a solution, other than winning a lottery?
Know Your Expenses
Regardless of your level of income, the first step to improving your finances is always to know where your money is coming from (that is usually very easy) and where it goes. Keep a log and record everything. Your monthly bank account statement is not sufficient for this task. You can choose a tool that you are most comfortable with – paper and pen, an Excel spreadsheet or a free piece of software.
Divide Your Expenses into 3 Groups
Go through all your expenses and assign one of the following options to each:
Things You Won’t Change
Group 1 is the only one which won’t save money. Some of your expenses are fixed and can be neither reduced nor eliminated unless you want to face serious consequences. Examples include taxes and debt repayments.
Housing and utilities will also come to this group for most people. You could possibly move to a cheaper place or use less electricity or water, but unless you have been living above your means or really wasting money in this area, there is not much potential.
Fortunately, if you are honest with yourself, you will find that majority of your other spending can go to one of the other groups, which both save money.
Find Cheaper or Free Alternatives
Many everyday essentials, like food, clothes or transportation, are good candidates for the second group. It requires just a bit of planning and perhaps changing a habit.
If you commute by car, consider public transport, cycling or walking (distance and location will decide which is the most realistic option). If you eat your lunch at a restaurant every working day or buy expensive snacks, consider preparing your food at home (besides being cheaper it will most likely also be healthier).
Some expenses can be replaced with entirely free alternatives. If you are paying an expensive gym membership, consider running in the park or working out at home instead.
Reduce Frequency or Entirely Eliminate
While in the previous group you focused on reducing price, here you reduce the quantity. The best candidates for this group are things which are not really necessary for your survival and daily operation, but make life pleasant, like hobbies, entertainment and luxuries. Finding a cheaper or free alternative is often impossible or would defeat the very purpose of these things, but buying or doing them less frequently can save enormous amounts of money in the long run.
If you like going to a nice dinner with your significant other every Friday night, going only every other Friday may be a better option than going to a cheaper restaurant (and it may also become more special when less frequent).
Increase Your Income
So far we’ve been working on the expense side of your budget. Unless you have enough free time for a possible second job, increasing your income is hard to do quickly. However, in the long run, it is much more powerful and has greater potential than just reducing expenses. Whatever your current situation and profession, it is always wise to keep improving your skills and looking for possible opportunities to make your income higher in the future.