Ways to reduce expenses, settle debts, and increase savings in 2024
Experiencing uncertainty about your recent financial management? The beginning of the new year offers an ideal opportunity to revise your budget. Take a moment to analyze your bank and credit card statements, determining if your current expenses and spending aligns with your financial goals.
Establish a well-rounded budget
Numerous financial advisors recommend adopting the 50-30-20 approach to budgeting. Allocate fifty percent of your net income to essential living costs such as housing and groceries. Dedicate thirty percent to discretionary expenses like entertainment and clothing. Reserve twenty percent for savings and debt repayment.
Reduce significant fixed expenses
If your financial allocations are imbalanced, especially if a considerable portion of your income goes toward essential living costs, it may be necessary to cut down on fixed expenses. These are consistent monthly amounts, such as rent or mortgage, car insurance, phone bills, and utilities, often comprising the most substantial portion of your budget. Although challenging decisions, trimming these items can yield substantial savings.
To economize on housing costs, explore options like sharing accommodation with a roommate or moving to a more affordable location (considering potential changes in transportation costs). Additionally, review negotiable expenditures like car insurance or cellphone services to identify potential savings.
Trim spending on necessities…
Next, analyze variable expenses—essential items that fluctuate in cost each month, such as groceries, gas, and electricity. Establish a spending goal for these must-have items and take proactive measures to adhere to it. For instance, reduce dining out, seek discounts at the grocery store, and practice cost-effective meal prepping. To economize on clothing, consider buying secondhand or repairing existing garments.
… and indulgences
Examine discretionary spending habits and create a dedicated budget for non-essential items like streaming subscriptions, gifts, or vacations. Save on entertainment by utilizing resources from your local library, such as books, video games, and movies.
To resist impulsive purchases, maintain a ‘buy list’ and refrain from acquiring items until a predetermined time has passed. Additionally, categorize purchases by necessity and preference, asking yourself whether you ‘need it, love it, like it, or want it’. Ensure that any purchase aligns with your budget and brings lasting satisfaction.
Develop a strategy for debt repayment
Allocate a portion of your monthly budget to cover the minimum payments on your debts, including credit cards, student loans, and car payments.
If you find yourself with surplus funds in your checking account, consider using this opportunity to accelerate the repayment of credit card balances or other debts. This involves contributing more than just the minimum payments, so it’s essential to formulate a detailed plan.
Financial experts suggest two popular methods:
- Avalanche method. Prioritize settling debts with the highest interest rates first while maintaining minimum monthly payments on others. This approach minimizes the total debt to be repaid over time.
- Snowball method. List your debts from smallest to largest, focusing on paying off the smallest one first. Celebrate each small victory, using the progress as motivation to tackle larger debts, akin to a snowball gaining momentum down a mountainside.
Prepare for the unexpected—and the expected
Ensure that your savings account is adequately funded to handle unforeseen emergencies, such as sudden car repairs or unexpected flights for family members.
Strive to accumulate at least three months’ worth of living expenses. Calculate the sum of fixed and variable expenses along with debt payments (e.g., $2,000) and save a minimum of three times that amount, equating to $6,000.
Additionally, set aside funds for anticipated expenses like birthdays, anniversaries, and travel. Incrementally save a small amount each month to cover these planned expenditures.
Boost your available funds
If building an emergency fund proves challenging, explore avenues to increase your income, providing you with more financial resources. This may involve seeking a higher-paying job or venturing into a side hustle, such as tutoring, babysitting, teaching music, or crafting jewelry. Identify skills that can be monetized, ensuring you fairly compensate yourself, and be mindful of the potential impact on your taxes.
Channel these additional funds into a high-yield savings account featuring interest rates ranging from 4% to 5%. Opting for such accounts facilitates accelerated growth through compound interest. If your current banking institution isn’t optimizing your savings growth, explore alternative options.
