Develop a Personal Savings Plan by
Analyzing Your Spending

If you’re like many consumers, you are looking for ways to cut back on your spending, you might start by putting your expenses into two categories: necessities and luxuries. Necessities are those items that you must have. These would include food (groceries, not fancy restaurants), shelter (rent or mortgage), clothing and other essentials. Luxury items are those that you can live without or at least put off for a while. A health club membership, an iPod and a ski trip are all examples of these. For many of us, the road to (or back to) prosperity is in how we define our necessities and luxuries and developing a spending plan around these definitions.

Years of spending without regard for the financial future can lead to habits that are hard to break. For a lot of people, the idea of “keeping up with the Joneses” has crippled them financially. Others have developed a strong association with spending money and feeling good. Whatever your reasons for spending, if you don’t get a handle on them and develop greater, more powerful reasons for saving, you will not be successful.

Unfortunately, separating and categorizing “wants from needs” is mostly subjective. In fact, the definitions for necessities have broadened over the years. For example, a lot of people would now include a personal computer for the home, a cell phone, and an air conditioner as necessities. To make things tougher, there can even be shades of gray within each definition. While a sweater from a discount retailer might easily qualify as a necessity, it might fall into the luxury category if you buy it from a high-end retailer. The definitions are personal but it is important that you carefully consider how you go about categorizing your expenses or you will be setting yourself up for failure.

(1) Identify a monthly savings goal
(2) Review your credit card statements and other relevant documents to list all of your monthly expenses
(3) Put each expense into one of the two categories: necessity or luxury
(4) Determine which luxury items you can easily cut out
(5) If the luxury items savings doesn’t bring you to your goal, see what adjustments you can make on the necessities side; for example, buying your clothes from a lower-cost retailer
(6) Re-visit your plan each month to make sure you’re staying on track

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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