Frugal living is all about knowing your finances, good planning and by living by that plan. A lot of people in fact know their money and do some amount of planning as well if not the best plans. But tracking and going by the plan is where most people fail.
In this article, let us talk about the planning or frugal budgeting part alone
How to create a frugal budget?
Everyone who wants to live frugally needs to have a family frugal budget prepared. And this is how you go about the same.
- Add up your income (I): Total your monthly earnings including salary income, interest income, rental related money inflow etc. Let us call this figure ‘I’. At the moment, let us worry about only the steady monthly income and NOT any annual income such as bonus. We will need it later for annual expenses
- Project your monthly expenses (X): Now make a list of all your monthly expenses including your bills, grocery, kids education, eating out expenses, movies, shopping etc. Let us call this total monthly figure ‘X’. Again, you have to exclude expenses that are recurring and predictable. Any expense that occur only annually or once in several months do not figure here yet
- Check your monthly balance sheet: Subtract your expenses from income (i.e. I – X in the above example. If you are left with surplus amount, you are fine (though we can still minimize expenses by going frugal further). But if you are left with a deficit, you need to rework your budget a few times
- Rework: If you are left with a deficit in step 3, go over the expenses list and start cutting your luxury expense items first (e.g. eating out, movies, entertainment, shopping) and then go through your food and grocery list for excess items
- Debt and investments: If you have any credit card or other debts, you have to focus on reducing these debts at the earliest. Look into your budget and see how much you can squeeze it further to meet debt closure expenses every month (call it ‘D’). Further after keeping part the money for debt reduction, you need to start planning for your contingency funds and other investments for the future. Here you can also add up the money for any annual vacation etc. Let us call this the savings amount or ‘S’
- Annualized income (A): Next, consider all those income that comes to you on an annual basis for example your annual bonus or dividends. One twelfth of this annual income can be added as your monthly income figure
- Assess and rework:
Your income-expense formula now is (A / 12) + I – X – D – S. If this is showing surplus, you are doing fine. Otherwise again you have to go about working on your expenses or find new residual income streams. Once you have figured out what to do, it is time to freeze your budget - Live by your plan: The most important thing now is to live by the plan that you have created without spending a single penny more than what is planned. You are free to save more if you can. See how things go for a few months and if things are not looking good, you have to work with your plan again
Other frugal planning tips
The most important items in your expenses are debt reduction related expenses, retirement related investments, food related expenses etc in that order. Never postpone your debt payments and be ready to sacrifice your luxury items until you are debt free.
Frugal plans are made to execute and hence never dump them. You have to keep checking your plan and see how the execution goes every few days. Tracking is as important as planning.
Always plan for contingencies and unexpected expenses but never plan expecting an unpredictable stream of income or lottery.
Avoid investing in risky instruments such as stock market, until you are totally debt free. Even after that, you may exercise caution while deciding on what instruments to invest in.
Wishing you good success in your frugal life!
