Creating Wiggle Room in Your Budget

Being frugal isn't just for low-income earners; it's for everyone concerned about the long-term health of their wealth

We've all heard the expression "you have to spend money to make money." But when it comes to writing up and sticking to a monthly budget, a more apt saying might be "you have to spend less money to make more money." In other words, if you want to free up additional funds for investing, putting money into your retirement accounts, or having an emergency fund, then you really don't have a choice: you've got to create wiggle room in that budget. And to do so, frugality is the key.

There's plenty of advice floating around - from money managers, personal finance journalists and our moms - as to how to go about doing that. Tips can range from the mildly complex, like shopping around for competitive insurance rates, to the mildly condescending, like putting on a sweater instead of turning up the heat in winter. For many of us, budgetary shortfalls have less to do with fixed expenses like rent or car payments and more to do with that fluid and elusive aspect of our budget: discretionary spending.

If you're one of the millions of Americans in need of more budgetary wiggle room, the time has come to get serious about where your money is going. While everyone's financial situation is different, here are some strategies that can apply across the board:

  • Don't just compensate for impulse spending; punish yourself for it.We've all been there before: an innocent trip to the mall for one item turns into a spending bonanza, or a long-lost friend arrives in town and you blow your entertainment budget for the month in one night; you go for groceries on an empty stomach and end up spending more than you had planned. Most of us rationalize impulse purchases by saying we'll make up for them at a future point in our budgetary cycle. But have you ever considered taking it a step further? Try adding an "impulse purchase punishment tax." For example, if you overshoot your monthly entertainment budget by $50, don't just trim off $50 somewhere else in your discretionary spending. Tack on an extra 25 percent as punishment for your moment of frivolity. Not only will it discourage you from doing it again, but it will actually put you ahead of the game for the next month.
  • Keep your total debt-to-income ratio below 35 percent.There's no doubt that America is addicted to credit. If more than two-thirds of your gross income is going to service your debts, then "wiggle room" may not even be part of your vocabulary. Since a lower debt-to-income ratio equates to more spending power, you should always make paying off debt your biggest priority. As always, pay off those loans with the highest interest rates (i.e., your credit cards) first.
  • Let go of your sense of entitlement.Even with steady employment and good money management skills, you may find that unexpected financial expenses can derail even the most carefully planned budget. The trick is to always keep sight of the difference between necessities, should-haves and nice-to-haves. Creating wiggle room often means letting go of things you don't really need.
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