To become financially worry-free is not an impossible goal. Through a common-sense approach, you can achieve this goal by working at it systematically.
Imagine five buckets hanging in stair-step fashion, each below and a little to the right of the one above it. As water flows into the top bucket, the bucket begins to fill. When it is full, the water flows over the edge and into the second bucket. This process continues until all of the buckets are filled.
Imagine that each bucket represents one of the basic financial priorities. The first bucket represents basic needs: food, shelter, clothing and transportation. The second bucket represents financial security and includes an emergency fund and savings plan. The third bucket represents insurance needs, including life, health and property protection. The fourth bucket represents quality of life. The fifth bucket represents investments. The water that flows from bucket to bucket represents the resources a family has.
To build a sound financial base for a family, each bucket must be filled before resources are diverted to the next one. First, resources are used to provide basic needs.
As income increases and money is left after basic needs are met, the extra is used to develop an emergency fund and begin a regular savings plan. When saving is regular (ideally 10 percent of income) and the emergency fund complete (containing three to six months' salary), the next step is to purchase adequate insurance to protect the family.
When adequate insurance coverage is provided, extra money is then diverted to building quality of life. Quality of life focuses on acquiring some of the wants, extras and frills.
The last step is to channel the extra money available into investments that will provide a secure future for the family. This might include money for children's education, retirement or family goals.
This "bucket theory" of financial management is a common-sense approach to planning a family's financial future. It provides a systematic way for families to set and reach financial goals, and it helps the family build a sound financial foundation.
So how do we fill those buckets? By saving.
When most people need to save money, they immediately think of expenses to cut. Options may include giving up a hobby, canceling the cable TV, no longer going out to dinner or not buying the normal things that they purchase.
What these steps all have in common is that they require giving up something you like in order to reduce your costs. In doing so, you'll save money, but because you have to give something up, odds are you will not stick with it.
The truth is that the vast majority of people can save the amount they need without changing their current lifestyles.
This can be done by simply reducing the cost paid for items and services they are already buying. By spending a little time learning how to optimize savings, you can keep everything that you have right now, plus save several hundred dollars each month.
First, make a list that shows where all of your money is going. Once you determine this, you need to figure out ways to reduce the amount you are paying for each item on your list.
While this may seem difficult at first, the more you practice, the easier it will become. Here are a few examples of ways to accomplish this:
• Don't cancel your cable TV or move to a slower Internet service; look for competing offers and get the same service for a less expensive price.
• Do price comparisons to see whether you can get the same coverage on your car insurance and homeowner's insurance for a better price.
• Take a look at utility bills and see whether there are ways to reduce the amount you spend, such as washing clothes in cold water (you won't notice the difference) or installing energy- and water-saving devices.
• These steps aren't limited to services. If you purchase a couple of soft drinks each day at work, purchase them in bulk from a discount warehouse club. You get the same drink, but at half the cost.
These examples show how to get the same items or services that you are getting today, but at a better price. This frees up money, allowing you to save while continuing to live the lifestyle you have enjoyed.
By listing all of your expenses and reducing the amount you pay where it's possible, you can reduce your monthly spending.
While this system will not work for people who are completely out of control with their spending, it will work for most of us. The key is to focus on reducing costs without eliminating or reducing what you are currently getting.
Scott E. Taylor is the family and consumer sciences agent with the Hernando County Cooperative Extension Service.