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The five essential rules: Spending and saving

This feature was produced in collaboration between Vox Creative and Chase. Vox Media editorial staff was not involved in the creation or production of this content.

by Mai Nguyen

Employment is steady, hourly wages are up, and gas is ridiculously cheap. That extra money is likely to boost spending, says Anthony Chan, chief economist at Chase. And while it's good to feel financially confident, it's also good to keep your spending and saving in check.

If you're looking to boost your savings, be aware of what experts call your "spending triggers." They include shopping when you're stressed or sad, or being around spendthrift friends. Even the supermarket is designed to get you to spend more than you need to. "Don't trust your instinct," says financial psychologist Brad Klontz. "If you suddenly get an impulse to buy, ask yourself, 'Why am I feeling this?'"

Here are five rules to making smarter spending and saving decisions.

1

Know Your Money Goals


The first step in setting up a budget is thinking about what you really want — buying a home, paying off a loan, or saving for something special. Once you do, tracking your spending gets easier. "Having a financial goal doesn't mean just saying it out loud," says Tiffany Aliche, who owns financial education firm The Budgetnista. "It means actually putting it into action."

To make saving easier, Aliche recommends setting three goals a year, each with different deadlines, and making one of them fun, like a vacation. Each should involve a specific amount and a plan. If you want to save $600 in five months for a new TV, for example, that means saving $120 each month, which could mean packing lunch a few times a week.

2

Break It Down


A budget shows two things: where your money is going and how it can be managed better. To start, make a list of all your expenditures, down to the last latte, and include irregular costs like wedding gifts. Add up the monthly total of each spending category. If you're not sure about your spending patterns, get real estimates by tracking where you money goes for a few months, either on paper or a spreadsheet. "Then you can see where the unnecessary spending is," Aliche says.

Subtract your total expenses from your monthly take-home pay. If the number is negative, you'll need to make cuts; if it’s positive, put the leftover money in your savings. If you don’t have steady income, budgeting becomes especially important. New research from the JPMorgan Chase Institute looked at income volatility and found that 55 percent of Americans experienced a 30 percent change in their month-to-month income.

Use your budget to keep your spending in check. Get out your budget whenever a paycheck comes in and give every dollar a job, whether it’s rent, savings, groceries, or upcoming bills. Aliche recommends having two checking accounts, one for spending and one for bills. Transfer money into the bills account each time you get a paycheck and try to keep at least one month of bill payments in this account.

3

Plan for the Unexpected


No one wants to save money for a chipped tooth — let alone a layoff. But having an emergency savings fund lessens the likelihood you’ll have to take out a loan or max out your credit cards. When Lynnette Khalfani-Cox and her husband faced a $1,000 bill for an electrical problem with their car, it didn’t wreck their budget because of their emergency savings. The personal finance expert and author of Zero Debt: The Ultimate Guide to Financial Freedom suggests saving three months of expenses if you have a fulltime job and six months if you’re a freelancer. She recommends keeping this money in a separate account, to differentiate it from money set aside for other goals, such as long-term savings.

To start building up an emergency fund, be on the lookout for unexpected savings. If your friend paid for your $20 lunch or if the shirt you planned to buy turned out to be on sale, transfer the money you were going to spend into your emergency fund.

4

Save Early and Earnestly


Americans saved an average of $700 last year on gas thanks to cheaper prices. While most said they would put their windfall towards debt or savings, a report from the JPMorgan Chase Institute shows that they actually spent as much as 80 percent of those savings on things like restaurants, groceries, and movies. The data on how Americans spend and save is interesting: the U.S. personal savings rate increased to 5.2 percent, up from 4.8 percent a year ago — so even if people aren’t putting away their gas savings, they are starting to save more.

S. Katherine Roy, chief retirement strategist for J.P. Morgan, suggests putting aside at least 15 percent of your income every year to save for the future. "A good way to do this is by ‘paying yourself first,’ by having money automatically taken from your paycheck as early in your work life as possible," she says. Doing so means you benefit more from compound interest and maximize your savings over time.

To pay yourself first, set up your account so that it automatically transfers a portion of your paycheck into your savings, retirement, or emergency fund. Most banks allow customers to set up automatic biweekly transfers from one account to another as soon as payday hits. Aliche suggests leaving no more than three months of expenses in your checking account; the rest should go into savings. "People mistake saving for not spending," she says. "Saving is when you purposely put the money you didn't spend into a bank account."

5

Use Your Spending Power Wisely


Consumer confidence is rising and it’s expected Americans will be opening up their wallets in the next few years, says Christine Kilton-Augustine, portfolio manager of the J.P. Morgan Consumer Recovery Strategy. New insight on U.S. consumer spending reveals consumers are starting to become more comfortable carrying credit card debt, and that they’re most likely to use their discretionary income on smaller purchases like a new cardigan or sushi takeout.

With more purchasing power comes more reason to spend away. But if you want to avoid going over budget, there are a few ways to maintain control. Pick a few spending categories that you can pay for primarily with cash. If it’s restaurants, divide the total monthly cost by four. This is how much you’ll spend eating out in a week. Withdraw that amount at the beginning of each week, put it in an envelope, and when it’s gone, it’s gone.

Emotions can also get the best of our wallets, so if you’re feeling excited or bored or angry, wait at least 24 hours before buying. Despite our best efforts, retailers have ways to hook us. For example, at a grocery store, vegetables are sprinkled with mist to make them appear more fresh. Gum and gossip magazines are purposely placed at the checkout to make us feel like we have to buy them instantly. Knowing what kind of spender you are can help you understand your spending triggers. The best way to resist these ploys is to make a list of what you need and stick to it. "When people spend in alignment with their values," says Khalfani-Cox, "the frivolous stuff falls away quickly and they start making better choices."

Mai Nguyen is a freelance writer in Toronto who covers business and personal finance.

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This feature was produced in collaboration between Vox Creative and Chase. Vox Media editorial staff was not involved in the creation or production of this content.


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