I use a simple 6-step strategy to save over $25,000 a year, and it lets me travel the world

By Ed Coleman

If there is one thing my career in aerospace engineering has taught me, it's that simplicity is elegant. This applies to all things, including budgets. Budgets don't fail because you do math wrong. They fail because they are too complicated. 

I am good at math and numbers by all accounts, but those are the last things I want to deal with in my household budget. I want a simple approach that just works. That's how I came up with my six-step plan for actually saving money

I used this strategy to recover from a devastating divorce, and now it helps me save more than $25,000 a year, which funds my world travel. However, you don't need to be a rocket scientist to make it work for you.

Step 1: Calculate your base take-home pay

Take-home pay is the number that's on your paycheck or pay stub for a regular (no-overtime) work period. Things like your 401(k) deposits, insurance, and taxes come out first, but you don't have to worry about that. It's the actual deposit that matters.

I like monthly budgets, since my primary expense is housing (paid monthly). To keep things easy, I budget for the smallest month, or 28 days. That's four weekly paychecks, two bi-weekly paychecks, or two twice-monthly checks for a 14-day pay period. This method also creates a "bonus month" because there are 13, 28-day months in a year (13 x 28 = 364). 

My monthly take-home pay is $7,800. 

Step 2: Calculate your fixed expenses

Fixed expenses make budgeting easy because you don't have to think about them — just set up autopay and never miss a payment. Do this for your mortgage/rent, utilities, streaming video subscriptions, allowances for kids, or anything else you can think of that you pay monthly. The more fixed expenses you have, the easier your budget becomes.

Budgeting for fixed expenses is a math problem, but you only have to solve it once. I have about $3,550 per month of fixed expenses.

Step 3: Set a variable expense budget

The variable expense budget is the most critical part of staying on track financially. This is where you plan for date nights, eating out, groceries, gas, and all the things you usually spend money on but can't fit into a fixed expense.

It's important that you keep the variable expense budget healthy. Don't make it so lean that you blow the budget every month or can't cut out fat when things pop up. Be honest. Be healthy. Be real. This is discretionary spending, so be sure to use your discretion and not overspend this account. For my house, this is $1,200 per month, or about $25 a day. 

Step 4: Set up a budget for personal expenses

Do you want to know my secret to not fighting about money? Make sure everybody has a personal budget that they can spend on whatever they want. 

Want to try a new gym? Personal money. Need a haircut? Personal money. Saving up for a new mountain bike? You guessed it. 

My wife and I each get $500 a month of personal money. This money is ours to spend or save as we like, and we never have to worry about it. Also, since it isn't used for anything critical, you just spend however you like until it's gone, or don't. It doesn't matter.

Step 5: Calculate your savings

Simply put, your savings is everything that you haven't spent from your take-home pay. For me, the math looks like:

Take-home pay: $7,800

Fixed expenses: $3,550

Variable expenses: $1,200

Personal expenses: $1,000

Savings: $2,050 (the remainder of my pay minus expenses)

I didn't always have this level of savings. It took some soul searching to lower expenses, and there were years when this money went to debt payments. But I have it now — $26,650 a year going into my savings account (including the "bonus month" from Step 1). I split the savings down the middle for travel and home improvements. The catch is how to make sure it's there when I want to spend it. That's where the final step comes in.

Step 6: Use allocated direct deposit or automatic transfers to separate your money as it comes in

Savings isn't just an arbitrary line on a spreadsheet. It's money in your bank account. You get there by having one or more accounts for your expenses, and a separate account for savings. Deposit to the expenses first, and then place the remainder of your pay in savings. By setting up allocated direct deposit or automatic transfers, you'll make sure all the money goes where it belongs. This is the secret sauce to actually saving money.

There you have it, my six-step plan for saving. You start by figuring out your pay. Then you allocate expenses. And, finally, you set up direct deposit to fund each expense type without mixing the money streams. Anybody can put numbers into a spreadsheet, but it's the allocated direct deposit that puts the plan into action.

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