How to Save Money When Money Is Tight

You can have that latte -- and your cake -- if you make smart spending choices

Like many people nowadays, Christopher Pollard is facing some tough financial challenges. For one, his fiancée recently got laid off. Still, they're both excited about their coming European vacation.

How are they managing that luxury even in these difficult times? Pollard is choosy. A partner in a Minneapolis design studio, he's creative when it comes to saving money. He takes advantage of discounts and deals, thinks about what he's buying and why, itemizes expenses and talks with his fiancée and teenage daughter about their spending and his own.

"Once you get hold of where your money is going, then you can have a better handle on where you want it to go," Pollard said. "It's a mindset. You try to do your best to spend wisely and waste as little as you can."

Becoming a better saver is more than just cutting out the morning latte. It's changing your entire relationship to money. Some 12.5 million Americans were unemployed at the end of February, including 2.9 million who've been jobless for six months or more. From the market's October 2007 peak through January, U.S. shareholders lost almost 85% of the capital gains they'd amassed in stock mutual-funds since 1990. And while stocks rallied in March, we're not out of the woods yet.

It's time to get a grip on your money. Here are five suggestions on where to start:

1. Prioritize

Understandably, it's hard for many families to make ends meet, let alone save. But you might be surprised at what you can accomplish.

Take control of your household budget by logging every dollar you spend in a 30-day period. Once you face a month's worth of grocery receipts, lunch tabs, parking charges, highway tolls, cell-phone and utility bills, mortgage payments, insurance statements and impulsive splurges, you can begin to prioritize expenses and find ways to save.

Think big-ticket. Here's how to save hundreds of dollars a month: Set a higher deductible for home, automobile and health insurance. Refinance your mortgage. If you get a pay raise, use the windfall to trim debt and boost your bank account. After you've established priorities, that $4 latte might be worth it after all.

"At virtually every income level, every lifestyle, there's room for adjustment," said Brian Kompelien, a financial adviser in Minneapolis. "It may not be a quality of life adjustment, but more of a habit change. It's not easy to change habits, but focusing on what you're doing with your money can reveal opportunities to save."

2. Build an emergency fund

Put savings into a special account to be tapped only in a crisis, such as losing a job. You'll want quick access in a pinch, so stick to a high-yield savings account, not a locked-in CD or the stock market. A list of banks offering the nation's highest savings yields is at personal-finance Web site Bankrate.com.

This safety net brings peace of mind and can soothe other parts of your life. How much do you stuff into this cushion? Six months of living expenses is a rule of thumb -- longer if you're self-employed or the family's sole breadwinner, said Greg McBride, a Bankrate.com senior financial analyst.

3. Be creative

"When times get challenging, people get more creative," said Nathan Dungan, founder of Share Save Spend, an educational program that encourages healthy financial habits. "Be more attentive not only to how much you're saving, but where."

The Internet is a great resource. Take advantage of online retailers' discounts posted on shopping Web sites such as CouponCabin.com, DailyDeals.com, RetailMeNot.com and CoolSavings.com. Visit price-comparison sites including Bizrate.com, Shopzilla.com, PriceGrabber.com, BillShrink.com and Google.com's "Product Search" function to find bargains.

You can also save and give at the same time. BiddingforGood.com runs online charity auctions for schools and nonprofit groups nationwide. Donated items often sell well below retail.

4. Pay yourself first

You can't spend what you don't see. Send automatic deductions from your paycheck directly to a savings account -- one not linked to a checking account -- and cover monthly bills with electronic transfers. Even $50 a month of forced savings pads that emergency fund.

Moreover, do all you can to reduce household debt. Eliminating a 14% credit-card interest payment is like getting a 14% risk-free investment return, and lifts a heavy emotional weight as well.

5. Walk the talk

Live by example. Recession sales are everywhere, but you don't have to buy. "You're up against a consumer culture telling you to spend money you don't have," Dungan noted. "Make sure your actions support what you're saying."

Communication is key, especially in these trying, tense times. Talk with your spouse and family about money values and short-term and long-term savings goals, then decide how to fulfill them. These discussions don't have to be lengthy -- just regular. Review expenses and look for new savings avenues every month. Be open and honest, and you'll build a strong base for more than just family finances.