How to budget to reach savings goals

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 Q. I have a question about how to save money on a tight budget. My household is just me and my wife. We both work day jobs and she works a part-time job as well, so we are pretty much living on a paycheck-to-paycheck basis. We want to put some money aside for both a vacation and household maintenance account. We haven’t been on vacation in a few years and would like to have something to look forward to in summer. But we still have a lot of repairs to do around the house. Can you recommend a system to save money for these purposes?

A. Managing cash flow is an issue for most couples because we all have conflicting goals that can’t all be met at the same time.

In order to plan, you should write down all your cash flow expenses and them divide them into essential expenses — or needs — versus discretionary expenses, or wants, said Timothy Watters, a certified financial planner with Watters Financial Services in Paramus.

“Each partner should then separately rank the discretionary expenses from one to three,” Watters said. “Then, get together in a public place — harder to argue there — and show each other your lists.”

Watters said any expense that is a one for you but a three for your partner is off-limits and vise versa. If an expenses is ranked as a two or three, that expense could be modified or dropped to redirect the money towards other savings goals, he said.

He said it’s also important to divide savings between short-term and long-term goals.

“For example, saving for the holidays or vacations would be a short-term goal,” he said. “Many clients have found that setting up a monthly contribution to online savings accounts can be very helpful to reach specific goals. You can have different online savings accounts for different goals.”

For the long-term, he recommends you take full advantage of company retirement plans and/or IRA accounts. Initially, your goal should be to save at least 5 percent each year, he said, with a goal of increasing that percentage over time until you hit 15 percent a year for long-term savings.

Now that all may have sounded simple, and it is, but to budget in the most accurate manner possible — and to find places where you can cut back and redirect money to savings accounts — it’s important to be very specific in your expenses.

Some of these expenses are easy to identify, while others may take some research.

Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield, recommends you consider these items.

First, your fixed income. This would include:
— Earned income such as salary and wages. Note that you should use your net pay after deductions for federal and state taxes as well as Social Security and Medicare payroll taxes.
— Pension Income/Social Security – net after any tax withholding.

Then, look at your fixed expenses, which may include:
— Housing: Mortgage or rent, property taxes, homeowners insurance, maintenance and repairs and utilities
— Auto/Transportation – Auto loan or lease payment, gas, maintenance and repairs, auto insurance, parking, train, bus or other commuting costs.
— Food/Groceries
— Medical: Health Insurance, Prescription drugs, unreimbursed medical and dental
— Insurance: Life, Disability, Long-term Care, Umbrella or Excess Liability Insurance.
— Retirement savings: 401(k), IRA
— Clothing
— Other basic costs: Telephone, personal care, dry cleaning

After that, it gets a little harder. You need to try to document your variable and discretionary income and expenses. That may include:
— Variable Income: Bonuses, commissions, overtime and tips. “When estimating these items, you should be conservative in your planning and try to use what you feel are the minimum amounts you expect, even if you plan for `zero’ additional variable income,” Papetti said. “This approach will assist in helping to manage your expenses on more certain base income estimates. If you earn any variable income it will provide additional income to help meet your goals for now and in the future.”

Next, look at your variable expenses.
— Entertainment and dining out, and even those midday lattes
— Vacations and recreation
— Hobbies: tennis, golf, skiing etc.
— Family gifts: birthdays, holidays, special occasions
— Charitable gifts
— Miscellaneous purchases

Papetti said that credit cards, as long as you pay them off each month, can provide a good source for documenting your spending. Many offer monthly and year-end summaries of your spending by category and by month.

Once you have identified your income and expenses and created your personal budget, you’ll see if you have a surplus or a deficit. Then it’s time for the hard part.

“It is one thing to write it down, but it is another to execute it,” Papeti said.

Papetti said if you have a surplus, this provides a target amount to start your savings for both your vacation and household maintenance account. If your budget reflects a deficit, you need to examine if there is a way to increase your income which can be hard to do, or instead, see what expenses can be decreased without creating unrealistic spending that will set your budget up for failure.

“At a minimum, your budget should be reviewed on a monthly basis to see how close you are to your plan and if there were any unusual items that may have derailed your goals and knocked you off track,” Papetti said.

Papetti said if you are computer savvy and do most of your spending on credit cards and through online banking, Mint.com provides a free online budgeting system that can download your transactions and categorize them for you.

If you do not want to use an online budgeting system, he recommends the old-fashioned notebook or envelope system.

“The notebook system is where you write down in a notebook on a daily basis what your expenses were for the day and then total them for the month,” he said. “The envelope system is having a separate envelope for each category of expenses and place the expense receipt in the envelope each day that you will add up at the end of every month.”

Papetti said he often tells clients that one of the most important areas of their financial plan is to understand their cash flow and their sources and uses of their income and expenses.

“If you have a good understanding of your cash flow, you have a much better chance of accomplishing your goals of establishing a vacation fund and household maintenance fund,” Papetti said. “As a dear friend and client who has since passed used to tell me, ‘If your outflows exceed your inflows, your upkeep becomes your downfall.'”

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.