# Save 10% By Spending 10% Less

Ask any financial planner how people can increase their personal savings and you're likely to hear the phrase "pay yourself first." This means immediately setting aside money from each paycheck as soon as you earn it, rather than waiting to see what, if anything, is left at the end of the month.

The best way to "pay yourself first" is to use some type of automatic deposit plan such as an employer 401(k) or 403(b) plan, mutual fund automatic investment plan, or credit union. That way, the money is placed into savings before you even miss it. Saving "windfalls," such as the annual state property tax rebate, is another good way to set money aside for future needs.

The remainder of this article is about a savings strategy called "The 10 Percent Solution." Simply stated, it means trying to save 10% of your gross income annually by reducing flexible household expenses, such as food, clothing, and entertainment. Over time, the savings can be spectacular. A family earning the median U.S. income could have a nest egg of over \$55,000 in 10 years by placing 10% of its annual earnings in an investment paying 6 percent interest.

Here's the math behind this calculation. The median household income in the United States in 2000 was \$42,151. One half of households earned more than this amount and the other half earned less. Ten percent of \$4,2151 is \$4,215. If \$4,215 were deposited each year in an investment yielding an average of 6 percent, in ten years an investor would have \$55,557.

A lot of people would say that there's no way they could save \$4,215 a year (about \$75 a week). Perhaps 5 percent is a more realistic figure, which can be slowly increased over time. The trick to "finding" money to save is to track household expenses for several months and identify those that can be reduced. Forms to do so can be found on the Rutgers Cooperative Extension MONEY 2000 Web site: www.rce.rutgers.edu/money2000. Aim for a 10% reduction of expenses, if possible. Perhaps your phone bill can be reduced by a cheaper calling plan (or e-mail) or entertainment costs, such as eating out, can be shaved.

One place where significant savings can often be found is the family food bill. According to the latest report from the U.S. Department of Agriculture (May 2002), a middle-income family of four spends an average of \$175 a week for food eaten at home. Ten percent of that is \$17.50 or an annual savings of \$910 (17.50 x 52). The next time you go food shopping, take a good look at what's in the cart before checking out. Are there expensive snacks or convenience foods that you can do without or make yourself? Are you buying anything that might end up in the garbage because nobody really likes it? Are you comparing the cost of store and manufacturer's brands and taking advantage of coupons and special promotions?

Apply the same cost cutting tactics to other household expenses: clothing, gifts, entertainment, personal care, transportation, etc. Also determine if there are ways to reduce large expenses such as housing (e.g., refinancing mortgage), income taxes (e.g., tax-deferred or tax-free investments), and insurance (e.g., policy discounts).

By combining savings in several expense categories, it may be possible to save 10% of your gross income without feeling deprived. Like fad diets that severely restrict what one eats, strict budgets rarely work. It is also important to have a reason to save. In other words, one or more specific financial goals (e.g., a new Ford Taurus in 2004). Having something in mind as an eventual use for your money will increase your motivation.