The New Rules of Finance

Thrift is the new black. Some advice from the Wall Street Journal on how to save money in 2011.

Here are five things you can do to establish your own thrifty bona fides.

1. Get on a budget

For the personal-finance writer, this is a bit like recommending that people floss more. Fact is, everyone hears about budgeting, but very few people actually do it. The key here is to start simple and keep it simple. Don't let minutia deter you from getting the budget down in rough terms. You have your income (salary or other income, after taxes), and you have your expenses (housing, food, transportation, etc.). Ideally, the difference between those two is positive. If it's not, then you know you're losing money on basic expenses, and we haven't even gotten to fun things like movies, trips or new clothes! A number of websites, such as Quicken.com, provide budgeting help. SmartMoney.com (part of The Wall Street Journal family) also has a number of budget-related worksheets that can help get you started on the numbers-crunching game.

2. Eliminate credit-card debt

Once you get on a budget, the first thing you should do is eliminate your credit-card debt. Why? Because it's almost certainly the most costly debt that you have. I know this is challenging for many of us, but before you can start thinking about cashing in on great investment opportunities, you have to get rid of expensive debt. This advice might sound like common sense, but a surprising number of people try to build a savings account or investment account while maintaining relatively high balances on their credit cards. This, of course, doesn't make much sense. Credit-card interest rates can easily run in the mid teens. Savings rates are nearly 0% in many cases, and investment accounts on average return 6% to 9% over time -- though not lately!In other words, you'd be much better off paying down the expensive credit-card debt and then moving on to investment and savings.

3. Reduce the cost of a common thing

Once you've got a budget, look for a common thing (meaning something you do often) that could be done more cheaply. For instance, I plan to start riding my bike to work as it gets warmer. A friend of mine says she is opting to walk to the coffee shop rather than drive. These small actions save money on subway fares or gas. It may not sound like much, but it adds up. The key is to find something already built into your lifestyle and do it in a cheaper way, creating a recurring savings. Energy costs are another way to build in savings. For instance, energy costs can fluctuate. Up north, winter is usually costlier. In the south, the summer, especially if you have air conditioning, can be more expensive. Take the peak months and maintain a budget that handles those peak months. As the costs come down in nonpeak months, move that extra money into savings instead of blowing it on something frivolous.

4. Delay gratification

It's good to treat yourself to a nice meal or a trip somewhere. But you can't do it every day. As my grandfather said, "First we work, then we eat." By delaying gratification, we build discipline, we establish control of our financial lives. For instance, say you want to get a flat-screen television. There are several ways to do this. Pop out to Best Buy and put it on your Visa -- and sort things out later. That would be a carefree approach more common in the pre-crisis era.

Second, you could time the purchase to come after a key income moment, such as a raise or an expected bonus. At least in this way, you are directing a reward toward the acquisition. A bit more disciplined. Third, you could set a savings goal and build in a "matching" notion that would go into the flat-screen TV fund. In other words, you decide that you want to add $5,000 to your savings account in the next 12 months. For each dollar you put into the savings account, you put 20 cents into your flat-screen TV account. Once you get to the goal, you will have a contingent "reward" account from which you can buy the flat-screen TV.

5. Develop an accountability strategy

When you commit to something -- exercising more, eating better, saving money -- it is challenging to stick with it. Whole forests have been felled in the name of books meant to help us stick to self-improvement promises. A powerful tactic is to share your goals with someone you trust so that this person can hold you accountable. It's easy to tell ourselves that we'll "get to it tomorrow." It's tougher to confess letting things slide to someone who is holding you accountable.

Who is the ideal accountability partner? Ideally, someone you trust enough to be straight with, especially when you're not meeting your goals. Spouses can keep each other accountable, and that's how my wife and I have it arranged. Other options are good friends, but make sure you're ready to give it to them straight. If you prefer someone more removed from your personal life, a financial adviser or even someone in the clergy might play a deeper role in helping you meet your goals. Share your budgeting and money-saving strategy with your accountability partner and then schedule check-ins on a weekly or monthly basis. Ideally, your accountability partner will help you get back on track when you fall behind.

Share