Living on half your income. Impossible? No. Daunting? Yes. How do we accomplish this? With willpower made of steely determination and making major sacrifices. Add to that a dash of honesty, and you're on your way. Easy, right?
All joking aside, the obvious first step is to cut back on your spending, and the way you do that is by taking a hard look at your expenses. But first, let's take a look at why anyone would want to save half of his or her income.
Given the recent challenges with the economy, it's just smart to save half your income. Even if you can't save half, you should aim to get pretty darn close to it. After all, you never know when you'll face a rainy day due to a layoff, illness , car problems, legal issues, etc. Many people are just one paycheck away from financial ruin. Living on half your income prepares you to live on less while saving more for that rainy day. And you can do this whether married or single. The question becomes: Can you live on less to save more?
How to Get There
If you're married, pick one income to live on or save half of your combined income. If you're single, save half of your income.
1. Track your spending for 30 days. Think of the next 30 days as an examination of your spending patterns. As with any diet, prior to getting started you must look at your current eating habits, and decide what must change to reach your goals. The same concept can be applied to improve your financial health. Track your spending habits for 30 days. On a weekly basis review your spending, and take inventory of necessary purchases and any frivolous or impulsive buys. Cut the extraneous expenses the following week, and you'll have renewed insight into where exactly your money goes.
2. Go on the no spend diet. For the following 30 days, challenge yourself to spend money only on the essentials. This is where the steely willpower comes in. Can you limit yourself to only the essentials? Or will the daily latte, weekly happy hours or monthly shopping sprees (aka "retail therapy") get the best of you? If you're successful, then your bank account will thank you.
3. Automate your savings. After you've tracked your spending and then limited said spending to only the essentials, now you're ready to rock and roll. Open an account and set the amount to be saved weekly, monthly or biweekly. Ideally, the money shouldn't hit your "spending" account – it should be automatically drafted into savings.
Avoid the Hurdles
House. How much will that "fun" but oh so optional do-it-yourself project cost you? How about the new surround sound speakers for the media room? New window panels for the dining room? Can you afford to let certain home-related expenses slide? Before shelling out cash for home improvements, decide if they are absolutely essential.
Car. Take a look at your expenses related to your car. This includes gas, insurance and maintenance. For those of us who live in toll areas, E-ZPasses are huge wallet busters! Taking a trip to New York from Northern Virginia? Expect to hit a few tolls on the way to your destination. The commute from the Washington, D.C. suburbs into the District can also rack up expenses after going through the toll plazas. The obvious solution is to avoid the tolls, and find alternative routes. Another car-related expense: gas. You can easily cut down this cost by utilizing savings clubs like Sam's Club or Costco, which sells gas about 20 to 30 cents per gallon cheaper than some gas stations. Also call your insurance company and ask about options that will save you money on the monthly premium. Can you increase the deductible and adjust the coverage to the minimums? Shop around for a lower rate, compare prices and see which company can save you money.
Kids. Bless their hearts, but they must be entertained. This can include eating out, buying random toys at the store, the last-minute school trip money that must be paid - tomorrow. You get it. Kids are expensive. The best way to set yourself up for success is to tell them about your new spending plans. Include them in your financial reviews, and make it a family activity. This way you can teach your kids the value of money while they help you reach your goals by being more conscientious about their financial requests.
The payoff is pretty awesome if you can swing this major financial task. Asking a family to save half their income today is like asking most people to cut off their left hand. Thoughts abound around how this will happen and what sacrifices must be made. But the payoff in the end saves you money and keeps you afloat should a worst-case scenario materialize.
Ginger Dean is a licensed psychotherapist and founder of the personal finance website Girls Just Wanna Have Funds.