Using Your Budget to Save Money

How to Build Savings into Your Budget

Step 1: See how much you have available to save

In part 1, we had you write down all your expenses and total them up. How does that number compare with your total income? Do you have money left over? If so, this will become the savings that you build into your budget

Smart Money Tip: Know how much to save

Ideally, you want to save about 5-10% of your income. So, if you make $100 every month, then you should save $5-10. If you have more to save, that’s not a bad thing. You can never have too much money in savings.

Step 2: Find clever ways to cut back

Before you build savings into your budget, look back over your expenses. Is there any expense where you feel like you’re spending more than you should spend? If so, cut that expense back.

Even if you already had money available to save, this is a good step to take. Overspending can be a trap, so you want to monitor your expenses to make sure your spending is always reasonable.

If you cut back an expense, make sure to go back and adjust the number you have on your expense worksheet.

Step 3: Add savings to your expense worksheet

Now that you see how much extra income you have available to save, you’re ready to build savings into your budget. Write savings down on your expense worksheet with the amount you can afford to save after steps 1 and 2.

Smart Money Tip: Don’t confuse with savings and free cash flow

It’s a good idea to leave a little breathing room in your budget. Don’t save every penny you have available. Instead, leave some extra cash that doesn’t get designated for an expense. That way, if an emergency or unexpected expense comes up, you have money to cover it. This money is known as “free cash flow” and it should be separate from savings.

Step 4: Balance your budget

Now that you have savings built into your budget, you’re ready to total everything up. You want to make sure you always spend less than you earn.

So, subtract your total expenses from your total income to see if your budget is balanced.

Smart Money Tip: Keep the free cash flowing

A good rule of thumb is to only spend about 75% of what you earn every month. That spending includes savings since you’re treating it like a bill you pay yourself. That way, even when emergencies come up, you still save money consistently.

So, going back to our example, let’s say you make $100 each month. You determine you can save $10 each month. Your expenses, including that $10 in savings, should total up to $75. That leaves $25 to cover expenses that pop up unexpectedly during the month.