Everyone says that you get ahead by saving money. Everyone agrees that you need to save money. Advertising campaigns are built on the concept of saving money. However, when it comes time to put together a budget, most people can not find anywhere to put savings. People are living from paycheck to paycheck, and, in that kind of environment, they are concerned with paying the bills, with savings disappearing into the land of "if I only could."
So the question arises, if I want to be serious about saving money, where does it belong in the budget? How can I incorporate savings into my plan as an integral part of my budgeting, rather than as a leftover that gets the short end of the stick?
Savings as an Expense
One way of putting savings into your budget is to consider it an expense, and to pay this expense off like you would any other bill. This is the basis of the phrase "Pay yourself first." Consider yourself a creditor of your income just as much as the utility company, the bank, and the grocery store. Pay this bill like you would any other bill, and you will be putting money aside. One of the strongest advocates of this approach is the VERY successful Robert Kiyosaki. He says that he and his wife had their accountant put 30% of their income into a savings / investment account, and then lived off the rest. George Clason, in "The Richest Man of Babylon", says to put aside 1 coin out of 10, and live off the remaining 90%.
Savings from Extra Money
The other main approach is to focus on the difference between income and expenses, and to pull your savings out of this amount. The more you make, or the less you spend, the more you can save. By focusing on the difference, what you keep, you can control your spending impulses. Dave Ramsey uses this principle when he talks about the "Latte Factor"; by not buying a latte on the morning commute, and putting that money into a savings plan, he shows how you can make great strides towards financial freedom.
Melding the Two Ideas
I have found that different people save differently, and what you need to do is find a way that feels comfortable to you. If your savings plan feels like a straitjacket, then you will unconsciously rebel against the savings plan, and you will find reasons not to do it. By finding a plan that works for you, that feels right to you, you will find a plan that you can and will support.
Having said that, let me give you a few thoughts about particular savings and where I see them fitting into your budget
Retirement savings is something that you should be doing on an automatic basis. Every paycheck or every month, you should be putting something away towards your retirement. I have found that most people react well to considering retirement savings to be an expense. Whether you have it deducted from your paycheck (eg, 401 (k)) or whether you have an automatic payment from your checking account (eg, IRA), putting your retirement savings into your budget as an expense means that you will not forget to do these savings.
Emergency savings are those monies you have put aside to handle the situations that life throws at you, whether it is the car breaking down, you breaking your leg, or your job being downsized. How much to put into emergency savings has been discussed elsewhere (I myself have written on this in many places), but you really need to have something for these events. Most people, however, do not want to put this as an expense, since the amount of money here is usually fixed and, often, quickly replaced. By using the extra money at the end of each month, you can save exactly what you feel comfortable doing, rather than feeling forced.
Goal savings are where people do things in many ways. Some goals, like vacations, new cars, or schooling, lend themselves to being incorporated in the budget as an expense, admittedly for a limited period of time. Other goals, like home improvements, are usually handled from the extra money left over after the bills, which is accumulated and then used. This is the savings where I see the most variation on approaches, and this is where you should probably do some experimentation to find the plan that works for you.
Whatever you do, I encourage you to save, and there is any way you think I can help you, please feel free to contact me.