Knowing how to spend money is the most important factor in creating a budget that saves money. Image: CC Jake Wasden/Flickr

Unless you win a $380 million Mega Millions jackpot, smart spending is the only way to avoid debt and save for retirement. Becoming financially literate is one of the keys to smart spending. Having the commons sense to realize there is no such thing as “unexpected expenses” is another.

Financial literacy and financial independence

Most financially independent people don’t win the lottery or inherit a fortune. By making smart spending decisions every day, people become prosperous, live their preferred lifestyle and look forward to a secure retirement. To be a smart spender, one cannot simply rely on other people’s advice. Financial literacy is necessary to understand such things as how to create a budget that is sustainable. Elizabeth Warren, the head of the Consumer Financial Protection Bureau, recommends the 50-30-20 rule. Necessities like food and shelter take 50 percent. Buying things to support a particular lifestyle should constitute 30 percent. Save 20 percent.

Smart spending decisions

Even with smart spending, saving 20 percent of a paycheck is a daunting challenge to most. Just looking at what’s coming in and what’s going out won’t get the job done. Shopping around for the best prices on food, phone, Internet, TV and insurance will get a person closer to the 50 percent mark for necessities. Swallow your pride and start clipping coupons. Dedicated coupon-clippers can save up to 50 percent on groceries. A family of four focusing on coupons could save $5,000 a year, according to grocery spending numbers in the U.S. Consumer Expenditure Survey. Developing that level of discipline can be made easier by keeping financial goals such as college tuition, a vacation or a mortgage at the top of your mind every day.

Emergency fund based on credit as well as cash

When it comes to allocating 30 percent to support your lifestyle, an important aspect in that category should be an emergency fund. Anyone who owns a home, drives a car or inhabits a human body should expect expenses out of the ordinary spending routine. Personal finance gurus tell people to have an emergency fund to cover living expenses for a year. But that’s unrealistic for people who don’t win the lottery or inherit a fortune. Protecting access to credit by taking care of your credit score is just as important as saving as much cash as you can.

Sources

New York Times

NewsObserver.com

USA Today