Starting your journey into frugality can be a little (read: very) painful. Creating lifelong frugal habits is a process that takes time to develop. You’ll try things that won’t work for you, and be surprised by other things that do work for you. Be patient with it! To get your started, here are the steps we took to start our frugal journey.
Track Your Expenses
First, you’ll need to start tracking your expenses. Understanding where your money is going is absolutely key in managing your finances. I recommend using Personal Capital for this. Personal Capital allows you to aggregate your various bank accounts and organizes them into one handy dashboard. It’s a great organizational tool for your finances. Play around with it, it’s fun I promise.
Categorize Your Expenses
Once you’ve started tracking your finances, organize your expenses into categories. Examples are mortgage/rent, utilities, eating out, entertainment, groceries, phone bill, internet bill, charitable giving, you get the point. Conveniently, Personal Capital automatically does this for you. It also lets you change the categories or create custom categories. Super handy! After all your expenses are categorized, organize them into three groups: fixed mandatory, flexible mandatory, and discretionary. Few things are fixed mandatory, these are things that would involve excessive effort to change, if they can be changed at all. Think things like your mortgage and student loan payments. Flexible mandatory is a much bigger category – this is stuff like utilities and groceries. You’ve gotta eat and you’ve gotta pay the bills, but you do have some influence over those expenses. Everything else is discretionary. This should be things like eating out and entertainment.
Soul Searching aka Cutting Back
Next you have to start doing some real soul searching. Start looking at all your categories that fall into the flexible mandatory and discretionary groups. Go down the list and see what flexible mandatory expenses you can reduce. I’ll devote an entire other post to ideas for this. I would challenge you to cut most if not all of your discretionary spending. I know, it sounds crazy. You deserve that new cozy sweater, or that nice dinner out. After all, you work hard right? You do work hard, but you know what is a better reward? Knowing you’re saving that hard earned cash in a low fee index fund. Be brutally honest with yourself on this one – think of a time you purchased something you didn’t really need out of impulse, habit, or maybe because you were bored. I bet it felt great in the moment, it’s a rush to clutch that new cozy sweater. But the rush doesn’t last does it? How long did it take before you wanted to buy something else, or treat yourself in some other way? Giving into our consumer culture does not bring lasting happiness.
Now, I’m not saying you should give up all discretionary spending forever. What I am suggesting is more of an “elimination diet” for spending. It’s a chance to figure out what is really important to you. Maybe you love travel, so it’s worth it to you to spend on trips. Or you could be a foodie, and checking out different restaurants a couple times a month is worth the expense. Work towards figuring out what is truly worth spending on. Again, this is where you have to be brutally honest with yourself.
Respect even the small expenses – $5 here and $10 there adds up over time. These small expenses are easy to forget about, but over time they can have a significant impact on how much you can save and invest.
Figure out what is truly worth spending on.
Add up what you think you can cut out in a month. Then multiply that number by 12 to see what you’ll be saving in a year. Now multiply that number by 10 to see what that number will be over 10 years. Really want to get excited? Start plugging numbers into this calculator and see how much that money can grow if you invest it. Use this as motivation to start implementing these changes in your life. You’ll have slip ups, we all do, but if you can even save a little more it’s better than nothing! After all, no one was ever disappointed about having a little extra money in the bank, were they?