I'm in desperate need of financial advice. My husband and I have two kids and earn more than $75,000 a year. It seems like we should have enough money, but we live paycheck to paycheck and sometimes overdraw our checking account. I've thought about going to a financial adviser for help. But since we don't have a big portfolio, I'm not even sure an adviser would talk to us. Are there any tricks to saving? How do I start a budget and stay on it? -- S.T., Carmel, Indiana
It would be nice if I could give you some magical incantation or secret budgeting tip to quickly and painlessly transform you into a diligent saver. But, let's be real. We all know saving money boils down to one thing: Living on less than what you earn.
For most of us, this is easier said than done. In fact, saving is an unnatural activity for humans. We're hardwired for immediate gratification. We see a shiny new car, we want a shiny new car. And we know that by spending (or borrowing) we get to enjoy it right now.
Devoting money to our financial security or a retirement nest egg, by contrast, doesn't provide that instantaneous good feeling. Small wonder that the psycho-economic playing field is tilted more toward spending money than saving it.
Fortunately, there are a few strategies that can help you overcome this natural bias toward spending and give you a shot at becoming an assiduous saver.
The technique that I think is most effective doesn't involve budgeting per se, but arranging your financial life so that you'll have a better chance of living on less than you make.
You do so by turning the tables on the whole budgeting paradigm and focusing not on the spending side of the equation, but the savings side. Specifically, you set a savings target and make sure to hit that first.
The conventional budgeting approach would have you divide your spending into various categories -- housing, utilities, entertainment, etc. -- and then shave your expenditures a bit in each category. So rather than buying a latte and croissant each morning at Starbucks, you might save a buck or so each day by having a coffee and Boston Kreme at Dunkin Donuts instead. Or you might save even more by making breakfast at home.
The problem with this method is that even if you manage to cut back in various areas, there's no assurance the money you're no longer spending on croissants, late-night pizza, new clothes or whatever will find its way into savings. You may just end up spending it on something else.
You have a much better chance of actually getting money into a savings or retirement account by specifically earmarking a certain portion of your annual earnings for savings -- say, 10% or in your case, $7,500 this year.
To make sure that $7,500 is actually saved, you could enroll in your company's 401(k) plan and agree to contribute 10% of salary. Each month $625 would go from your paycheck into your 401(k) before you even have a chance to get your mitts on it (and before the government gets to tax it). If your employer doesn't have such a plan, you could sign up for an automatic investing plan with a mutual fund company that will transfer whatever amount you stipulate from your checking account to your fund account each month.
Or, for that matter, you could split your savings between a retirement account and other savings. (Ideally, you should start your savings effort by building an emergency fund equal to three-to-six months' worth of living expenses in a savings account, money-market fund or CD.)
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The point, though, is that by setting aside savings first, you'll little choice but to live on less than you earn. With $7,500 siphoned off the top for savings, you'll no longer have $75,000 (before taxes) to spend. You'll have $67,500 (actually, a bit more to the extent you contribute to a 401(k) as your contribution lowers your taxable income and your tax bill).
As a practical matter, this means that, one way or another, you'll have to arrange your life to get by on your salary after savings. Whether you do that by making a lot of small economies (brown bagging it for lunch, choosing a bare-bones cable TV package) or one or two big ones (owning a less expensive car or living in a more modest home or apartment) doesn't much matter.
The key is that you fit your lifestyle to the amount of money you have after you've set aside savings (and, of course, that you don't subvert the whole process by funding extra spending with debt).
There are other techniques that can also help you salt away some dough. As I've suggested before, you can turn the urge to spend into an incentive to save. For example, you might set a savings target -- say, $5,000 for the year -- and, if you hit it, give yourself a nice little reward at the end of the year: a weekend getaway, an electronic gadget, whatever.
Or if you're one of those people who respond better to penalties than rewards, you can check out the StickK site. Once there, you create a "commitment contract" to achieve a certain goal, say, save $1,000 within six months. Fail to reach that goal, and you must pay a penalty you set in advance -- $100, $500, however much you choose -- to whatever person or organization you designate. To increase the pain of failure (and the incentive to succeed), the person or organization that receives the dough if you fall short should be one you don't much care for.
And, of course, you can always go with the old standby, budgeting, whether it's putting together a conventional budget or going with a variation like the "bucket budget," which many people find easier to create and follow.
By the way, I really don't think you need an adviser to do any of this. But if you feel you won't follow through without some handholding, you could always hire a financial planner on a flat fee or hourly basis to help you get started.
But whether you decide to go it alone or seek help, I suggest you get moving now while the impulse to save is still strong. Because the longer you live a lifestyle that doesn't include regular saving, the harder it will be to change.
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