Tired of living paycheck to paycheck

(Money Magazine) -- Question: I've been trying to be a little more thrifty lately. I realize that a lot of the luxuries Americans have are "wants" not "needs." Basically, I'd like to balance my household budget so I don't end up with just $30 at the end of the month. I'd even like to start building some savings. Any suggestions? --Kim, Idaho Falls, Idaho

Answer: A lot of people are experiencing the epiphany you've had about wants vs. needs.

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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Of course, we also have to keep in mind that one person's indulgence may be another's necessity. For example, a recent MainStay Investments poll that asked just over 1,000 baby boomers about their attitudes toward saving for retirement found that 46% considered weekend getaways not a luxury but a basic need.

I guess I can understand that. Someone who puts in lots of hours at a high-pressure job might very well see the occasional short trip not as an extravagance but a way to preserve sanity in a hectic life. I have to admit that I'm less sympathetic, though, to the 2% of my fellow boomers who classified professional manicures and pedicures as a basic need.

But despite individual differences in what we may consider "wants," it does appear that Americans have been rediscovering thrift of late. Last week's figures from the Bureau of Economic Analysis show that Americans saved 6.4% of after-tax income in June, the highest percentage this year. Granted, that's less than the 8.2% in May 2009. But it's a huge improvement from the 1% to 3% rates that were common back before the financial crisis.

So now is a good time to gain control of your budget and start racking up some savings. The issue is how.

As I see it, there are two basic approaches. One is to create a budget -- which you can do at numerous places online including mint.com and the MoneyCenter at yodlee.com -- and then pore over it for places to cut back. If you'd like to see how your spending in specific categories -- housing, transportation, entertainment, etc. -- compares to other Americans' outlays in those areas, check out the Bureau of Labor Statistics' Consumer Expenditure Survey.

If you find that you're shelling out a lot more moulah for, say, eating out than Americans on average, you might target that as an area where you can exercise more control over spending. So instead of going to Starbucks every morning or to a restaurant for lunch or dinner several times a week, you might make more of your java or meals at home.

The second approach is to simply set a target -- say, 10% of your salary -- and automatically put that amount into a savings account or investments each payday, as if you were paying a bill. The idea behind this method is that doing your savings first instills a discipline of sorts.

If you're diverting 10% of each paycheck to savings, you'll have to live on the remaining 90%. That forces you to make choices. If you want to start your day with a latte and croissant each day and follow it up with take-out Chinese for dinner, that's fine. You'll just have to drive a more economical car or spend less on other things to stay within the income restraint your automatic savings regimen has imposed.

I'm more of a fan of the second system. That's because I think most people are pretty much wired to spend whatever amount of money they have coming in, if not more. (How else to explain Congress?) So I believe the best way to deal with this tendency to overspend is to limit the amount of money you have available for spending. That's why the automatic payroll deductions of 401(k) accounts work so well. You're more likely to save money if you don't get your grubby little hands on it in the first place.

But either method can work (as can a hybrid of the two, I suppose) as long as you're willing to accept one incontrovertible fact -- namely, that if you want to save money, you've got to live on less than you earn.

So my advice to you is to decide on a method that makes the most sense given your financial situation and personality. If you prefer the pay-yourself-first system, set a reasonable target savings rate and join the nascent savings movement. If you can't manage 10%, start with 5%, or even 3% and raise it gradually.

If you've got a 401(k) or similar savings plan at work, signing up for it is the easiest way to pull off this approach. If you don't, sign up for an automatic investing plan at a mutual fund company.

If you fall into the budgeting camp, go to a site that offers online budgeting and start looking for places where you can scale back your spending. I recommend you focus first on big-ticket items. And if you'd like to draw inspiration and ideas from others who have already managed to kick their savings effort into high gear, check out Donna Rosato's story on Secrets of Extreme Savers.

What's most important, though, is that you take some action now to start putting money away while you're in the savings frame of mind. Because if you procrastinate, the mood might pass, and years from now you may find yourself in an even worse position, older than you are now yet still with little or nothing saved.

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