Money Makeover: Create a spending and saving plan

MONEY MAKEOVER

Skimpy savings vex single mom

Mom's the breadwinner in this family. She worries about having enough money to retire, let alone support her sons.



The simple art of budgeting	» Notify me of the next issue

Profile: Lauren Heller

The problem:

She says: Short on college and retirement savings.
We say: Need to budget and build an emergency account.

The plan:

Create a budget to make room for more savings.

Follow-up:

Still no budget, but more savings and confidence.

The plan in 4 steps

Establish a realistic monthly budget.

Keep track of all expenses for a month to set budget.

Stay focused on daily spending. Track it all.

Tools: Use this work sheet to create a budget.

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The plan

Create a budget
Lauren's first steps should be to establish a realistic monthly budget and to track expenses every month against that target. She does not spend frivolously and is disciplined about only spending what she has. However, to maximize savings opportunities we recommend that Lauren utilize a budget and track expenses each month so that any excess can be applied toward savings. Getting a firm handle on both income and expenses will also come in handy as the payments on her home equity line of credit increase.

Beef up emergency savings
While Lauren's goals revolve around saving for her retirement and her two children's college educations, her first priority is to rebuild an adequate emergency savings fund. An adequate cushion is at least three months' worth of expenses, and for households with one primary wage earner, a sum equal to six months' worth of expenses.

Do this by immediately discontinuing the extra $100 that is being applied to the mortgage each month. Add that $100 to the $150 currently contributed to savings each month. This will boost Lauren's savings cushion by $250 monthly. Keep up this monthly contribution to the emergency savings account for the next six months. For even better results, open a high-yielding money market or savings account, where the returns are high enough to outpace inflation. This is important to preserve the buying power of the emergency savings fund.

Why should she stop putting an extra $100 per month against her mortgage and put it into a savings account? There are several reasons. Lauren has a low, fixed-rate mortgage and there are other priorities for that extra payment. Putting money against her mortgage means the money isn't readily accessible if she needs it. Case in point: Lauren has turned to a home equity line of credit to finance home repairs, paying interest to borrow against those earlier prepayments. The solution is to put the $100 into a liquid emergency fund where she can get to it without penalty if needed.

Keys to success

		Live on a budget to set boundaries on spending and to cultivate savings.

		Avoid high-cost debt or strive to eliminate it quickly.

		Create adequate emergency savings through automatic payroll deposits.

		Invest savings in a high-yield savings or money market account.

		Participate in an employer-sponsored retirement plan.

		Maximize tax-favored investment opportunities for retirement and college savings.

		Contribute to a Roth IRA as it permits tax-free withdrawals in retirement.

		Consider a 529 plan for funding college as withdrawals for college expenses are tax-free.