How to save money

Do you have more debt than you want and a lot less saved than you want? Do you want to know how to get out of this trap?

First of all, write down what you want to accomplish and set a series of goals. Why write? Because that piece of paper will act as a reminder of the commitment you made to yourself. Post it where you will see it each and everyday. This constant reminder will help keep you on the right path.

OK, what should you be striving for? Look at your debt. List each bill by interest rate in order from highest to lowest. For example, if you have three credit cards, a car payment, a school loan, a home equity loan and a mortgage, the three credit cards would more than likely be on top and followed by the car loan, home equity loan, mortgage, and school loan. You also need to take into consideration which of these payments are tax deductible. A mortgage payment at 6% is not really 6%. If you have a marginal tax rate of 25%, the rate is really 4.5%.

Next write down what bills you have to pay. This would include such things as your utilities, insurance, real estate taxes, etc.

Now list the items you commit monthly payments to that are discretionary. Items might include your gym membership, Internet service, and magazine subscriptions.

What's next? You will need to set aside a budget for groceries, gas, and entertainment.

Finally, what is left? All the previous steps include opportunities to reduce your overall expenditures. But you are just trying to get organized for now. From what remains, you will need to have an emergency fund equal to 3 to 6 months of your take home pay. You should also be contributing as much as you can to your 401k. Once you have an emergency fund, you need to start directing money to an intermediate savings fund. In this case, intermediate is between emergency and retirement.

Take what is leftover each month and assign a percentage to go to your short term emergency fund, your 401k, and debt reduction. For example, you have $100 left at the end of every month. Take $33 and apply it to the emergency fund, take $33 and pay extra on your highest credit card bill until it is paid off, and put the remainder ($34) in your 401k. In the meantime, look for ways to save on what you owe. When you get your tax return, a raise, or an annual bonus, apply it in this manner. Soon, you will be on your way to financial freedom.

TIP - What is the best way to force yourself to save? Does your employer allow you to split your direct deposit into multiple accounts? Setup another account for emergency funds and direct deposit a portion of each check in that separate account until you reach the desired balance. Then do the same for getting your intermediate savings fund started.

Stay tuned for more money management tips that will improve your overall financial health.