Category Archives: History Finance

Fastest Growing Industries in the United States

Construction in the United States is on the upswing. Seven of the top 10 fastest-growing industries in the country are related to construction. This data comes to us by way of the financial data provider Sageworks, which has compiled a list of the fastest-growing industries based on annual sales increases. This year, computer systems design and related services tops the list, followed by a variety of construction and utility-related industries.

1. Computer Systems Design and Related Services

This industry is far and away the fastest growing in the U.S. As quoted in Forbes, Sageworks analyst James Noe said, “There’s just an obvious need in the economy for these types of services. Everyone uses computers and businesses rely heavily on technology now, so in my mind, it’s a no-brainer that these types of services are growing fairly quickly.” According to a 2012 report from the U.S. Department of Labor’s Bureau of Labor Statistics, a 15 percent rise in employment in this field is expected from 2012 through 2022. Looks like that’s on track, with 18% growth last year.

2. Services to Buildings and Dwellings

This industry is comprised of all the establishments that provide services necessary for the maintenance of a property – cleaning (inside and out), extermination and pest control, as well as landscaping and outdoor construction, like decks, stone retaining walls, and fences. These services saw a 14% sales increase from January to December of last year.

3. Building Finishing Contractors

The industry’s name is rather self-explanatory, these contractors do the work required to finish a building, whether that’s additions, alterations, maintenance or repairs. This industry, too, saw a 14% increase last year.

4. Residential Building Construction

This includes construction, remodeling and renovation to both single family and multifamily residential buildings. 14% growth last year.

All of the next five industry categories saw 13% growth last year.

5. Foundation, Structure, and Building Exterior Contractors

The contractors who install the wood products above among other duties made up the fifth-fastest growing industry in 2016. This category consists of the specialty trades working on the foundation, frame, and shell of buildings.

6. Other Professional, Scientific, and Technical Services

These are jobs that require a high level of education, training and expertise. The services provided come in the form of legal advice, technological expertise, accounting, research, consulting, advertising, photography, translation and interpretation, as well as a number of others. Since computer systems design and related services are listed further up, we would have to imagine this category does not include growth in that particular technical service.

7. Building Equipment Contractors

With all of this construction, these buildings need to have internal work done, as well. This includes electricians, wiring installation contractors, plumbers, and heating and air-condition contractors.

8. Other Specialty Trade Contractors –

Specialty trade contractors consist of carpenters, brick and stone masons, tile and marble setters, roofers, drywall installers, sheet metal workers, ceiling tile installers, and many more.

9. Nonresidential Building Construction

Buildings and developments in this category include hotels, amusement parks, stores, office and public safety buildings, industrial facilities, schools, healthcare facilities, and churches.

10. Other Heavy and Civil Engineering

This industry is comprised primarily of two sectors, “establishments whose primary activity is the construction of entire engineering projects (e.g. highways and dams), and specialty trade contractors, whose primary activity is the production of a specific component for such projects,” according to the Bureau of Labor Statistics.

The Bottom Line

More than half of the top 10 fasting growing industries are directly related to new-home construction. Non-residential building construction is also part of the list. The construction industry, in general, may be one to keep an eye on, given these signs of an economic recovery.

 

The Secret to Managing Your Finances

The first step when organizing your finances is to determine what it is you would like to accomplish. After your goals are set, the most important thing you need to take a good look at is your cash flow, so that you can figure out the necessary steps to fund your goals. I suggest doing this in three steps:

  1. Add up how much you are spending.
  2. Figure out how much you earn and pay in taxes.
  3. Subtract your expenses and taxes from your income to calculate your discretionary income.
This is a cash management analysis. It does two things: it brings awareness to your spending habits, your taxes, and your income, and it allows you to plan accordingly. By plan accordingly, I mean that when you are faced with a decision to buy a new or used car, to buy a bigger home, or even just to add a monthly cable bill to your expenses, you’ll know exactly how that is going to impact your cash flow. So let’s explore how to figure out your cash flow in a little more detail. (For related reading, see 3 Steps for Creating an Emergency Fund.)

Spending

The best way to know where you are spending your money is to import all your credit card and banking transactions from the last four months into a free online budgeting software program. I prefer Mint.com, but there are several out there, including, Yodlee.com, MySpendingPlan.com, and others. Once you’ve opened an account and have imported your transactions, you can look at your spending trends. As you get more data, you’ll know how much goes towards food, auto and housing expenses. This also tells you where you can lower your expenses if needed.
If you’re interested, you can compare your spending habits with that of the rest of the country by looking at the latest Consumer Expenditure Survey. Mint does a nice job of suggesting ways to save money on credit card interest and fees, insurance rates and other expenditures. (For related reading, see Got a Raise? Here’s How to Avoid Lifestyle Creep.)

Income and Taxes

The best way to compare your earnings and tax bill is to look at Total Income on line 22 of last year’s tax return. Subtract line 60, Total Tax and any state or local taxes from their respective returns to determine your after-tax income.

The Importance of Building Savings Habits Early

We’re taught to save money from the time we get our first tooth fairy payment, but when we’re young, saving doesn’t always seem necessary. A common belief is that saving is for people who are getting ready to buy their own house, put their kids through college, or retire.

Why Saving Money Early Is Key

First, it makes savings a habit. Take the tooth fairy profit, for example. The quarter a six-year-old saves from the dollar she found under her pillow isn’t going to fund her college tuition (a child only has so many teeth, you know). But having her tuck that little bit away in a savings account or piggy bank will get her into the habit of saving a little from everything she is given or earns in the future. The same goes for high schoolers and college students. Saving some of their summer job pay or internship income will prepare them for saving when they enter the work world full-time. Opening a Roth IRA sooner rather than later can be one of the best financial decisions that a young person can make.

Second, you may actually have more money now rather than later. A recent college grad just starting their full-time career or a young newly married couple may find this hard to believe, but they may have more expendable income now than they will in 10 or 20 years. Just as their income will most likely increase over the years, so will their expenses. Moving out of an apartment into a house increases maintenance and utility costs. Having kids not only adds expenses like additional food, clothing, and medical bills, but parents also often find themselves needing larger cars and more living space to accommodate their growing family. If both parents decide to keep working, they are likely to incur childcare costs; and if one of them leaves the workforce to parent full-time, that income is lost.

Plan of Household Expenditure to Save from Retirement

“I’m Too Busy to Plan for Retirement”

Like all of us, you’re busy. Retirement is a fuzzy, distant event that has nothing to do with shuttling the kids to lacrosse practice or dance lessons while making sure family members with five different schedules manage to eat a semi-healthy dinner every night.

Maybe you’re a professional, dutifully saving 3% of your salary into a 401(k) every year and getting 3% on top of that in matching funds by your employer. This is better than most Americans: this rate of savings will fund a retirement in some form, but probably not the retirement you want. Saving at least 10% of your income (or more if you’re getting a later start) is often what’s required given the increasing likelihood that you’ll live to 85, 90 or possibly even 100. (For more, see Can I Retire Yet?.)

Why I Hate “Budgets” and Love “Spending and Saving Plans”

What comes to mind when you hear the word “budget?” Either it feels like an exercise in denial or it feels like a tedious, hours-long exercise of tracking where every single nickel is going in your household.

While scrupulous tracking may be required if you are in genuine financial crisis, it is not required if you have some money in the bank and are already saving at least a small percentage of your income each month. However, if you’re looking to save more for retirement and get yourself up into that 10% to 15% range that is required to fund what will likely be a retirement of 30 or more years, I do recommend having a simple spending and saving plan in place to help you get there.

With my busy clients, I’ve found the plan needs to be easy to set up and maintained in an hour or two per month; otherwise, like many other good intentions, it will get thrown overboard in the daily scramble. This household spending plan will have you off and running in a few hours and can be easily maintained once a month to help you meet your retirement savings goals.

Set Your Retirement Savings Goal

If you’re still in your 20s, consider setting a savings goal of 10% of your income. If you’re in your 30s or beyond and don’t have a lot saved for retirement, think about how you can get to 15% or more. (For related reading, see 5 Strategies to Avoid Outliving Your Money.)

This may seem a little intimidating, given all the categories of expenses that are competing for your paycheck. If so, rather than setting a final percentage goal (10% or 15%), make a commitment to increase your savings rate by 1% a year until you get to your final target.

Establish Your Spending Categories

Make a numbered list of all of your household spending categories. Lump things together as appropriate. For example, your heating bill, your power bill and your water bill can be combined under the category “Utilities.”

Separate other things that you think should be tracked separately. For example, consider separating “Dining Out” from “Other Entertainment” and “Food/Household Supplies” if you suspect you may be overspending in restaurants. Create no more than about 20-25 categories. Sample budget categories are included at the end of this exercise.

Make Some Super-Rough Spending Guesses

Spend no more than 10 minutes going through your list and making some super rough guesses on how much you spend in each category.  Do not get out any old bills, credit card statements or a calculator at this point. Put the spending categories into three buckets – big expenses, medium expenses and small expenses. The purpose of these guesses is simply to group expenses into the categories, not to understand where every dollar is going.

Choose Your Spending Plan Targets

Use the Spending Grid Tool below to help you decide which spending categories you will target for reduced spending. For each numbered spending category, draw an appropriate bubble on the grid.

Big expenses should go toward the top of the graph and little ones should go toward the bottom. Similarly, expenses you’d find easier to reduce should go toward the right of the graph while those that would be harder should go toward the left.

How Much in Savings You Need to Live Comfortably

According to the Federal Reserve’s study on economic well-being in U.S. households, published in 2016, Americans are satisfied with how they are doing financially. The number of adults reporting they are “living comfortably” or “doing okay” rose to 69%, up from 65% in 2014 and 62% in 2013. However, surveyors then asked a series of follow-up questions that called into serious question what most Americans perceive as comfortable. For example, 46% of study participants admitted that if an unexpected expense costing $400 arose, they would be unable to pay for it without selling property or borrowing money. Of the 22% of respondents who incurred an unexpected medical expense over the previous year, nearly half, or 46%, still had debt from that expense.

It’s difficult to rationalize the impressions most Americans have of their financial situations with actual numbers. Simple math indicates sizable overlap among those who claim they are doing fine financially, yet could not pay out of pocket for a basic car repair. This calls into question whether $400 in savings can support a comfortable existence. It also raises other interesting questions, such as how much in savings is truly sufficient to be financially secure, and how this number may vary based on a person’s stage of life and living standards.

Minimum Savings for Comfortable Living

Financial guru Dave Ramsey, who advocates debt-free living and financial security, advises $1,000 in the bank as a starting point for clients who are destitute or currently have no savings. This sum, though insufficient to live on for long if an income loss occurs, at the very least prevents a car breakdown or minor medical mishap from causing a financial disaster. Despite the high level of financial security self-reported by the majority of Americans, nearly half lack this basic first step for an emergency fund.

Three-to-six months of living expenses represents a more comfortable nest egg. Three months of expenses is a sufficient emergency fund in periods of low employment, assuming the person possesses high-demand skills. This level of savings is particularly secure if the person is willing to cut back on discretionary purchases and live a frugal lifestyle. Those with fewer marketable skills and those who have fewer expenses that they are willing to forgo should aim to keep a full six months’ expenses in savings.

Other Considerations

The exact amount that constitutes comfortable savings varies based on a person’s unique circumstances. A person with children requires a bigger cushion, since that person is responsible for providing for others. A single person with no children needs less in savings, particularly if he or she is willing to live a bare-bones existence or take any job that is available in a pinch.

A person who still lives at home with parents and has no expenses, or who shares a dwelling with several roommates and has minimal expenses, can more comfortably cut savings than someone who has a stack of bills to pay every month. Of course, many people in these situations find it an ideal time to put money away, perhaps saving up for a house down payment at a later date.

Similarly, a person’s debt load influences how many months of income represent sufficient savings. For example, if 30% of a person’s take-home pay goes toward debt payments each month, that person clearly needs more savings than a debt-free person.

Every person is unique when it comes to his financial needs. No matter the dollar amount of a person’s savings, what matters is the ability to stave off financial calamity for as long as needed in the case of a job loss or income reduction.

Is Investing $25 a Month Worth It?

Any time you move money from your checking account to another account, whether it’s an individual retirement account (IRA), investing in stocks, mutual funds or savings account, you’re making an important step toward a financially secure future.

But what if you only have $25 a month to invest? Can you still secure your financial future? Or is it better to put it into a savings account until it’s large enough to counteract fees? This article will explain how to evaluate fees involved in small investments.

How to Translate Fees Into a Percentage of a $25 Investment

Saving $25 a month will total $300 in a year, not including any interest. A $40 fee on an investment account equals more than 13.33% of your investment. Thus, this $25 investment would have to earn more than $40 in a year just for you to break even. This means that if the fee was taken out at year’s end, you would have to earn a 27% return on your money to break even. Why 27% instead of 13%? The reason is because your money grows steadily, and you earn interest on the amount you have in your account. For example, after one month you’ve invested $25, after two months you’ve invested $50, and so on. As your account grows, the principal on which the investment earns interest grows.

Therefore whether a fee is charged for buying stocks or mutual funds, maintaining or opening an IRA, or a savings account where your savings isn’t higher than the minimum balance, you have to consider whether the fee offsets the benefits of your investment. The easiest way to figure out if your fee is too high for your investment is to calculate how much money is necessary in interest or profit earned to offset fees. For instance, if you invest $25 per month, $3 equals 1% of your yearly total of $300 invested. Divide any fee by $3 to figure out the percentage you would have to earn to overcome the cost of having the account.

If you are investing a different amount, multiply your monthly investment by 12. Then, divide the result by 100. This tells you what 1% of your investment is.

Investing Directly With Mutual Fund Companies

Cut the amount of fees you incur by setting up an investment account directly with mutual fund companies. You can contact mutual fund companies through their websites or by phone and avoid the fees charged by brokerage firms or financial advisors. This is a good choice when you don’t have much money to manage.

A pitfall of investing small amounts through this investment avenue is that you are subject to losses. It is similar to investing in stock in that your principal can decrease, or even be lost, based on how the stocks or bonds in your diversified fund rise and fall. Therefore, make sure the amount you invest regularly, for example $25, isn’t money that you will need in the next two or three years.

Paying Off Debt

An alternative to traditional investing avenues is to invest in decreasing your debt load. For instance, you could add $25 to the minimum monthly payments you currently make on your credit card, which charges you a 12.9% interest rate. By doing this, you save roughly $3.23 per year for every $25 you pay off. When your debt is gone, you’ll be able to put more money into long-term investments and you won’t have to worry about a small fee eating up all your profits because your earnings will more than make up for the fee charge.

Decreasing Your Mortgage Balance

If your home is tied to a 30-year, $150,000 mortgage loan with a fixed rate of 6%, sending in an extra $25 per month with your mortgage payment will cut approximately two years off your mortgage repayment term. There are two reasons for this:

  • You’re paying down your principal. For every $25 you pay off, that’s $25 dollars less you owe on your mortgage.
  • The amount of interest you pay on the amount of principal you pay off is eliminated for the rest of the term of the loan.

For example, suppose that you have a balance of $148,000 on your 30-year home loan after your first payment, and you decide to send in an extra $25 this month. You now have a mortgage balance of $147,775. The $25 you just paid off will save you $143.59 over the life of your 30-year mortgage at a fixed 6% interest rate.

As a bonus, you’re essentially saving for retirement by helping to insure that you won’t have to make mortgage payments after you retire if you stay in the same home.

The Bottom Line

Putting aside $25 a month to invest in a savings account, mutual fund or individual retirement account is a worthwhile venture. However, pay extra attention to make sure profits counteract fees. Also, consider alternatives, such as reducing your credit card debt or amount owed on your mortgage loan, that will allow you to invest larger amounts in the future.

Is Amazon Prime’s $99 Annual Fee Worth it? It Depends (AMZN)

With more than 64 million people paying $99 a year for Prime membership with Amazon.com Inc.

Amazon.com Inc AMZN 967.99 + 1.16% ), this would appear to be a good deal. However, for the other 50 million-plus Amazon shoppers asking the question “Is Amazon Prime worth it?” the answer depends on how much they think they can benefit from the long list of Prime perks.

The Value of Free Shipping

Initially, the major draw for Prime membership was the free shipping, which was a good enough reason for many Amazon shoppers who joined. Considering that the average amount spent by Prime shoppers is $1,200 versus about $500 for nonmembers, the savings on shipping costs may be more than enough to justify the membership fee. The big difference could be attributed to the free shipping Amazon members get on most purchases, which others do not. However, if nonmembers buy an average of one item a month from Amazon, paying an average of $12 for two-day shipping, Prime membership would be worth the cost. Even for an average shipping cost of $6 for five-day shipping, the cost of membership may be worth it if at least 16 items are purchased during the year. For more patient shoppers who don’t think they will make that many purchases, Amazon does offer free Super Saver shipping on many items when the total purchase is at least $35 with a five-to-eight-day delivery.

When You Need It Now

For diehard shoppers who can’t wait for free two-day shipping, Amazon Prime has added additional shipping perks, including free same-day delivery in some areas on eligible items. Amazon also offers free one-hour delivery on some items in some areas through Amazon Prime Now. Members can always upgrade to one-day shipping for as little as $2.99 per item.

The Rest of Amazon Prime’s Benefits

With the likes of Wal-Mart Stores Inc. (NYSE: WMT

Wal-Mart Stores Inc WMT 80.40 – 0.32%) competing for online shoppers’ business, Amazon has had to continuously add new benefits to sweeten the deal for Prime members, and it seems to be working. How much value Amazon actually adds to the membership depends on the lifestyle habits and preferences of the prospective member. For people who buy music and movies online, those who like to get advanced notice on Amazon deals, those who can benefit from unlimited photo storage and those who enjoy getting free books, there may be added value in addition to the free shipping. However, many of Amazon Prime’s benefits come with some limitations, so a nonmember would have to carefully consider each along with the alternatives.

Free movie and TV streaming: with its Instant Video service, Amazon is aggressively pursuing the streaming video market. Like Netflix Inc. (NASDAQ: NFLX

Netflix Inc NFLX 171.40 + 1.34% ), Amazon offers its own lineup of original content, including television shows and movies. The major benefit Amazon offers is the ability to download movies and television shows for viewing offline. Amazon also added Showtime, Starz and other streaming services to its menu, though there could be additional monthly charges for individual subscription to these services. In comparison, Netflix costs around $95 a year for its own content and add-on services.

Free music streaming: members also have access to Prime Music, which offers advertisement-free access to more than a million songs. The song library may not be nearly as big as other popular music streaming services, but nonetheless, this service is included in the membership.

Free books: prime members have access to Amazon’s Lending Library, which allows them to check out one book per month. With more than 500,000 titles, there should be enough to satisfy most people’s tastes. There is also Amazon’s Kindle First, which offers members the opportunity to choose from four new books for a free download each month.

Free photo storage: Amazon Prime Photo offers members free unlimited photo storage with automatic uploading from a smartphone or camera.

Free Trial and Other Ways to Pay

Amazon offers a free 30-day Prime membership trial, which may be enough time to try some of the services. If not, Amazon now allows for monthly payments of $10.99, but that adds $32 to the cost. However, members can cancel at any time. Amazon offers college students a six-month free trial, after which they pay just $49 annually.

For people who shop regularly on Amazon, the free shipping is still the main draw for Prime membership. However, the additional perks add enough value for just about anyone to feel they are getting a good deal.

 

Tips for Your Household Expenses

Becoming a millionaire may not be your ultimate goal. But everyone wants to enjoy financial freedom and learning where we can easily save money will help us on that journey. So whether you want to be the millionaire next door or just be able to have financial peace, these 10 tips will help you achieve your financial goals.

Clarity Money

Clarity Money is an app that works great if you pay all your bills with your bank account. It simply ties into your account and shows any monthly payments that you have. This allows you to see if there are any services that are no longer bringing you value or if you are not using anymore. (For related reading, see: 7 Money Saving Tips for Eating Out.)

Cut the Cord

For those that have not cut cable out, it may be time. Cable can add at least $30 per month to your monthly expenses. This could be lunch, gas or even money invested for your future. With services like Sling, Netflix, Hulu and Amazon Prime Video it is making less sense to have cable anymore.

Call Your Internet Provider

If you have already cut the cord, you should still negotiate a lower rate for your internet. Every time my wife or I have called our internet provider to “switch” providers they have offered us a lower payment in the end. Recently my wife called and we actually received a lower payment than we were paying and with a faster speed than we had. Remember it costs more to attain new customers than to retain a customer, you have the leverage.

Bulk Purchase Household Goods

Everyday items should be bought in bulk. Toilet paper, paper towels, napkins, detergent (dishwasher and washing machine), toothpaste etc. It is cheaper for companies to package items in bulk which makes it cheaper for us as consumers. Take advantage of this.

Use Your Dishwasher

Dishwashers actually do save you time and money. They use the same amount of water every time you wash your dishes compared to washing dishes throughout the day. You don’t realize how much water and money is going down the drain. (For related reading, see: Alternatives to Cable TV.)

Home Energy Audit

Many energy providers will conduct free energy audits to see if your house is running as efficiently as it could. Even if your energy provider doesn’t provide this free service you can conduct one yourself with this guide.

 

The Two Cheapest Days to Fly in August

Why Are These Dates a Big Deal?

The big deal is what these August dates represent: the start of the cheaper fall season. The airlines know that by these particular dates, kids are mostly back in school so demand slacks off significantly. Airlines still have to fill those empty seats, though, so they lower their ticket prices. Last month, for example, Southwest advertised a big sale for domestic travel, good for flights starting Aug. 22. Note: These cheap summer dates vary slightly year-by-year, but always occur in late August. In fact, this year’s Aug. 22 date may vary a day or so for some U.S. travelers depending on the departure city and route.

How Much Can You Save?

This, too, can vary. Generally speaking, travelers save anywhere from 11% to 20% off the peak summer airfares. The amount within that range will depend in part on where you take off, where you go, and whether you fly non-stop or on connecting flights. In almost every case, though, you will save something. Here are some examples of roundtrip fares found this week on FareCompare, my airfare comparison search site:

Los Angeles – New York, nonstop

  • Aug. 19-21 – $483
  • Aug. 26-28 – $403

Seattle – Dallas, one-stop

  • Aug. 19-21 – $381
  • Aug. 26-28 – $292

Boston – Dublin

  • Aug. 19-26 – $750. one-stop; $1,128, nonstop
  • Aug. 26-Sept. 2 – $590, one-stop; $979, nonstop

Note: The earlier Europe price of $750 may actually skew a bit high because it was found just a couple of weeks in advance of the travel date. Shoppers generally find the best Europe prices when they book three to four weeks in advance. Still, these fares offer a pretty good idea of what can be saved – which leads us to the next step.

When Should You Shop for These Cheaper Dates?

If you plan to fly on or shortly after Aug. 21/22, the time to shop is now. Again, 21 to 30 days in advance is ideal for booking flights on larger legacy carriers (including American, Delta, United). You have a little more leeway on the smaller, low cost carriers like Spirit and Frontier, which can offer deals one to two weeks before departure.

Are There Other Good Dates to Fly?

Flying throughout the fall is generally a bargain, especially if you stick to traveling on the traditionally cheaper days (Tuesday, Wednesday, Saturday; weekdays for international flights).

Cheapest fall travel period: Early November. As long as you avoid flying the days immediately surrounding Thanksgiving, you will find some genuine deals, especially in the first couple of weeks in November. Then, once the Turkey Day travelers come home you’ll see more good deals through mid-December.

Then What?

Suggestion: Make plans now for a winter vacation in January. If you can take off after the first week in January, the savings can be unreal (and this is true for a lot of international trips like Europe). Some Caribbean destinations might be pricey because that’s when people want to go.

If your first-choice destinations are too expensive, check out prices to Florida beaches like Miami or Ft. Lauderdale instead and you may find your bargain paradise.

How to Create a Budget You Can Actually Stick With

Do you feel like your finances are out of control? Are you charging too much on credit cards each month? Do you feel like you are always strapped for cash? Do you sometimes wonder where you are going to come up with enough money to pay your bills? If any of these describe your financial situation, putting a budget in place may help you. Here are five easy steps to take to start the process of creating a family budget that you can stick with.

The best way to start developing a budget is to begin tracking your current spending. For the next month, track every cash and credit card expenditure – some people prefer paper tracking, but there are many online and app-based trackers available to help you. This will give you the most accurate picture of where your money is currently going and will be very helpful later on in deciding what spending habits you may be able to reduce or cut out altogether. (For more, see: 6 Budget Must-Haves.)

Get an Accurate Picture of Your Income and Expenses

This is truly the first step in developing a budget. You need to know how much money you have coming in each month and how much you have going out to pay bills. Write it all down, track it with an app, or use a spreadsheet, but you need to get a clear picture of your income and expenses. Make sure you also include quarterly or semi-annual expenses in your budget as well, for example real estate taxes, life insurance, and homeowner’s or renter’s insurance.

Figure Out Your Disposable Income

Your disposable income is the money that is left over each month after all of your bills have been paid. This is the money that can be spent on discretionary items. To figure out your disposable income, add up all of your income, add up all of your expenses, finally, subtract the expense total from the income total.

Total Monthly Income – Total Monthly Expenses = Disposable Income

Disposable income can be used for the items that are wants and not needs. If discretionary spending is too high, this is the best place to start cutting items from the budget.

Decide What Can Be Cut from Your Budget

Besides discretionary spending, such as eating out, shopping for unnecessary clothing, shoes, or toys, there may be some other line items on your budget that can be reduced. For instance, can you save money by choosing a smaller cable or satellite package for television? Is there a cheaper internet service provider, or a way to save on your home phone? Many times, you are even able to call these types of service providers and ask for current promotions that could save you money as well. (For more, see: The Beauty Of Budgeting.)

Include Savings as a Part of Your Budget

While savings are technically a discretionary part of your budget, you really should look at it the same as you would any other expense each month. Why look at it as an expense? Because it should be accounted into your budget every month.

It should be just as important to put money into your IRA or 401(k) as it is to pay your rent or mortgage. Setting money aside for retirement each month can be made easier if you have the money come directly out of your paycheck from your employer and go to your 401(k). If you are self-employed, you may want to set up a separate savings account that a set amount of money goes to each month to be invested. If savings are set aside even before you get your paycheck, it will be easier to keep this a priority.

Make Sure Your Budget Is Realistic

Don’t set your budget and yourself up for failure. Trying to trim your budget is good, but don’t try to trim it to the point that you won’t be able to live within that budget. For instance, if you don’t allow yourself any spending cash during the month for eating out, you may find it too restrictive. So instead of cutting this out entirely, budget it in – but at a lower level than before. So, if you used to eat out every day during your lunch hour, try cutting that down to only eating out once per week – it will save money, but you won’t feel so deprived.