The steady stream of questions and comments from interested readers has led me to the creation of a new HIT Investments Series: The Mailbag. Since I write for you, I might as well write about what interests you. The mailbag will be a recurring piece that responds to your questions, comments, and concerns. There will be no magic formula regarding what topics are covered. It may be that many of you are interested in one topic or it may be that one of you poses an interesting question or thoughtful comment. With that in mind, here we go:

Q: I was wondering about savings. I’m not great with savings in general, not that I live paycheck to paycheck or spend all my money when it comes in, but I don’t allocate money in any place in particular and from what I read, this is a good way to manage your money.

I was wondering how you might put money to the side. For example, do you put money away for travel, for car issues, house, etc? Is this a % of your income?

Any thoughts around that?

A: First off, living below your means and saving is a mindset.  To be successful you have to believe you are a saver. With that one idea in mind, here are a few tangible steps on how to improve your saving habits.

1. Develop a budget

For some of us, spending significantly less than we earn is neither natural nor easy. If that is you, develop a budget. A budget will outline your income and expenses, helping to clarify where your money is coming and going.

A simple google search for a household budget spreadsheet or a free online option like are both good options to get started. I used an online budget to start and then converted it to an excel spreadsheet to personalize further. For example, most standard budgets include common income such as wages, tips, and bonus, as well as common expenses such as mortgage/rent, insurance, and groceries. But you may want lines for charity, kids’ college funds, and travel.

This is not an easy process to start. But starting and sticking with it early will almost certainly show you areas where you can cut down on expenses and increase your savings. The most successful budgets take into account every penny earned and every penny spent. You should have lines on there for “savings” (most advisors suggest a 10 percent minimum), “travel” (mine is about 2% of my income), and known future costs (down payment on a house, car, college savings for self or kids). If you don’t have a budget already, you probably won’t be at the 10 percent savings floor that is commonly recommended (the Average American saves 6%). Don’t be discouraged. Start the process and learn where you can spend less and save more. Take it one step at a time.

2. Build an Emergency Fund

Rather than having a bucket for every expense, since there can be many one-off expenses, lump them into one emergency fund. Budget after budget is blown on a regular basis because of “unexpected” expenses. Why the quotes? because we should expect the unexpected. Our car, water heater, furnace, or health will all eventually break down and require an expensive fix. Then to not only focus on “unexpected” expenses, but there is also the risk of income loss.

In the beginning months of your budget, use your “savings allocation” to build up an emergency fund. Most financial experts advise you to save 3-6 months of expenses. I recommend you keep at least 1 year of expenses in a liquid account that can be used for “unexpected” expenses or income loss. For example, my wife and I no longer have full coverage on our cars because we have made a commitment to keep the cost of a replacement vehicle in our emergency fund. We have also committed to keeping enough money to cover our maximum out of pocket expenses on our health and home insurance, along with our estimated yearly grocery and utility expenses.

3. Use the “Need” vs. “Want” method

Before every purchase, I ask myself if I need it or if I want it.  Most often I want it. A vast majority of the things most of us buy are items that we want. For example, we still have my wife’s car that she used in college and I am typing on a computer that we have had for 8+ years.  I would like a new computer and a new car, but when I think about it, I have not yet come to the conclusion that a new one will actually make me any happier or more efficient.

One example is buying pre-made meals when you could buy and cook the ingredients yourself.  Admittedly, I do not always go to that extreme of a measure, but I do try to ask myself on all “want” purchases if the price is worth the value.  Will the added cost make me more efficient, healthier or happier?  If the cost is not worth the value, I almost always pass and walk away.

4. Make your savings work for you

After you have built up your emergency fund and mastered the “need” vs. “want” method, start investing the excess. The end goal is to get in the habit of reducing expenses associated with your “wants” and re-allocating the savings to areas you value.

For example, my wife‘s and my goal is to become financially free as quickly as reasonably possible. Using the previous 3 steps has to lead us to spend about 40% of our income on budgeted expenses, 10% to charity/church and the rest goes to replenishing our emergency fund or is invested.

*One item I should have mentioned with the “want” vs. “need” philosophy is that you have to fight not to succumb to narrative bias.  When I ask myself if I need it, sometimes I will develop a story in my head to warrant a need to purchase that product or make it worth the value.  But then after developing that story I forcefully have to make myself come to reality, and then decide if that story is likely or if I am making it up so I can purchase the item even though it will not make me happier, healthier or more productive.

Q: On a personal note, do you ever worry/think about missing out on nicer things? For example, I bought a Mac computer, it seemed logical, it’s easier to use, has better programs, better for graphics, video edits, etc. I’m on it all the time and thought a good quality computer would be better than buying a less than quality computer every other year because the keyboard’s buttons have worn off or the battery won’t charge anymore.

I wouldn’t call a Mac a necessity but it makes life easier and more pleasurable for my work.

If I never tried a mac and didn’t take the time to learn how to use one and didn’t spend the money on one I wouldn’t reap the benefits of using one every day.

What do you think about a situation like this?

A: I would generally agree with your purchase of the Mac (if you had the cash on hand or saved up to purchase it).  In your situation, the cost was worth the value by your assessment of time savings, the reliability of the product, and ease of use.

Not specific to your mac purchase but with electronics, in general, I usually let others test the newly released products. Then after the bugs are worked out and the price has been reduced, I use the need vs. want method. If the benefits outweigh the cost, I go for it.

If you have a suggestion for one of our reader’s questions leave it in the comments, if you have a question for me, tweet @hitinvestments or send an email to [email protected]