With home equity evaporating like dry ice on a hot day, many Americans can no longer rely on their homes as a source for quick cash. Likewise, credit card issuers are lowering credit limits for many consumers, imposing constraints on spending.

Americans are realizing that the spending party is over and it’s time to build wealth the old-fashioned way — by saving money.

Some obstacles stand in the way. For instance, real median household income grew by a sloth-like 1.3 percent between 2006 and 2007, to $50,223, according to the U.S. Census Bureau. It’s not likely to accelerate much in 2008.

For the average budget-challenged family, the escalating cost of living can be discouraging. But saving money involves a clever combination of cutting expenses, and allocating any savings into a bank or investment account before the money disappears.

The goal is doable with stalwart financial discipline.

The savings game plan
  1. Know where your money goes
  2. Set up multiple investment baskets
  3. Get psyched and stick with it

1. The budget workout: Know where money goes

If you’re serious about reining in spending, you’ll need to implement a budget. Only 39 percent of Americans say they use a budget to track household spending, according to a survey by the National Foundation for Credit Counseling.

Most consumers find it tough to save money because few families actually know the exact amount of money that’s being allocated to a particular expense, says Gary Foreman, publisher of Stretcher.com.

“The main purpose of a budget isn’t to tell you whether you can spend money or not. It’s to tell you where you’re spending it so you can take corrective action,” he says.

Nipping unnecessary spending is tough without a budget worksheet. In fact, you’re likely to derail your savings plan without one.

Budget worksheets can be especially useful for tracking ATM cash withdrawals — one of the easiest items to overlook because of the frequency of these transactions.

“One has to detail every time money from an ATM is withdrawn and where that money is being spent,” says financial adviser Steve Pomeranz, CFP, host of National Public Radio’s “On the Money!”

“Some may not be so inclined to want to do it, but it’s part of the effort to get your affairs in order,” he says.

2. Set up multiple investment baskets for different goals

Once you’ve gotten to the point where you’ve contained wasteful spending, it’s time to focus on savings strategies.

One approach: Set up investment baskets for short-term, intermediate and long-term goals. For the first two baskets, divert a portion of your paycheck straight into a bank and brokerage account before you can touch the money. For the long-term basket, contribute to your company’s retirement plan or your own IRA.

Your short-term basket should serve as a six-month cash cushion that you can draw upon in the event of an emergency or unexpected job loss.

“It can be a savings account or money market account, and the yield is the least concern with that short-term money,” says financial adviser Steve Pomeranz, CFP, host of National Public Radio’s “On the Money!”

“It’s about protection of capital and liquidity.”

Money for large purchases such as homes, vacations or a new car should be drawn from an intermediate savings basket composed of CDs and other intermediate-term savings instruments that can grow for periods of six months to several years, Pomeranz says.

A good strategy is to use the CD laddering technique. It works by maintaining a pipeline of CDs that mature at different intervals.

“The idea is to make sure the money is not completely accessible to you,” says Gary Foreman, publisher of Stretcher.com.

To learn more about the advantages of CD laddering, use Bankrate’s CD ladder calculator.

Finally, your last basket is for long-term goals such as retirement. Whether you’re investing in an IRA or a 401(k) account, you’ll have access to stock and bond funds, as well as funds that contain both asset classes.

“By segregating these baskets, you don’t have to worry so much if the market is going down because you know that the cycle is going to play out in X number of years. And if you manage your money appropriately during the tough times, you have a very good chance of making a decent return,” says Pomeranz.

3. Get psyched and stick with it

Sometimes people get overwhelmed if they perceive that the savings goal is too large. They end up getting frustrated and give up. So it’s important to keep yourself psyched.

Identify successes along the way, no matter how small. It’s just as important to see the plus side of your balance sheets go up as it is to see your liabilities go down.

It’ll go a long way toward maintaining a positive mental attitude and sticking with the game plan, says financial adviser Susan Zimmerman, co-founder of Mindful Asset Planning in Apple Valley, Minn., and author of “The Power in Your Money Personality: 8 Ways to Balance Your Urge to Splurge With Your Craving for Saving.”

Zimmerman says savers shouldn’t be afraid of opening the mail because they assume that every statement is going to be a bill.

“You need to see (your monthly statements) and watch them grow to be able to embrace what that’s doing for you now and that you have some positives in your financial life,” she says.

“It’s an absolute psychological benefit.”

Debt and poor budgeting habits are like weight gain. They sneak up on you, and before you know it, you’ve got a problem that won’t go away overnight.

Consumers need to stay focused and realize that it may take a few years before results from modifications to financial behavior are positive.

Financial happiness means not having to live paycheck-to-paycheck, says Steve Pomeranz, CFP, host of National Public Radio’s “On the Money!” He adds it’s important to have patience and a balanced strategy to get to the point where you can enjoy a solid financial cushion.

“Your attitude will really will change once you get some money in the bank and you get some breathing room,” he says. “Unfortunately, it’s not very sexy, but the tortoise wins the race over the hare in the long term.”

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