How Does Saving Money Fit Into A Budgeting?

According to Warren Buffet, you should first save money, then spend the rest. I personally agree with that. But I had an advantage, which many do not. I never had any significant debt. I use credit cards but to earn cash back, and do not carry a balance, so never paid any interest.

But, if you do what I do, it will be easier to fit saving money into budgeting. IF you have any debt such as student loan, car loan or credit card loan, first pay those off. And you have to set a priority. For example, you pay 20% APR on credit card debt, 10% on a car loan, and 5% on student loans. Priority one should be to pay off credit card debt. Then priority 2 would be car loan and priority 3 would be a student loan. And your life goal should be not to take loans and consume. Like your car is a huge liability, it depreciates in value, and on top of that, you pay interest on the loan.

For example, you invest $100 in the money market account and earned $2 on that. But, on the other hand, you paid $20 to your credit card as interest. You could have saved $18 if you would have paid $100 to credit card company. This is just an example, to show how earning a lower return than the cost of capital actually makes you lose money.

Anyway, once you pay off all loans you will increase your cash flow. And one thing, while you have such debts ( I am not talking about mortgage here) you should not save money. Because mostly you will not make ore than the interest you are paying. Always check the cost of capital. While you have a credit card loan, on which you are paying 20% interest, you cost of capital is 20%. Unless you make more return on your investment than cost of capital, that is a loss making investment.

Once you are free of all debts then you can use some strategies to save money My favorite is automatic savings before you get paid. Like contributing to retirement funds. And work effectively to save money wherever possible. Cut out dining out or do not buy the new car, and definitely do not buy the new iPhone every year. Unfortunately, these are all liabilities that we consume. Instead of that focus on buying cashflow assets like rental properties or dividend-paying stocks. While budgeting as you focus on saving money, you should focus on cutting down expenses too. While you might think, cutting down expenses is difficult, but list down all your expenses. When I say expenses, think about all “money outs” from your bank accounts. that will include paying off your debts too.