“Frugality Planning” for Economic and Personal Downturns

November 11, 2008 by wendy.

As we are headed to the end of a pretty horrible economic year, some of my clients have asked me what they can do to improve their personal financial situation. While they cannot control the economy or the political situation, they can control their own finances. I tell them they can start by developing a “spending plan” – otherwise known by that dreaded word budget. They don’t know if they will be laid off, if their business earning will be down, or if they will need more funds for their current living situation. Moreover, if clients are considering divorce, they will very likely have to live on less income – so planning for that time is extremely important.

Some people ask me how they should begin to budget their spending. Following are some steps to help readers get started:

a. Go through your bank statements and credit card statements to categorize expenses.
b. Review cash purchase. You may need to keep a cash control book. Write down everything you spend cash on for 2 weeks to a month.
c. Divide expenses into mandatory, semi-optional, and optional.
d. Find any slack that can be eliminated or reduced. For example, if you find yourself spending $20.00 per week on lattes, consider reducing your spending to 2
lattes per week. Watch out for late fees and overdraft charges from credit card companies and banks. These fees can easily add up to several hundred dollars
per month for many people.
e. Set a goal for your expenses in each category.
f. Track your expenses monthly. If you are over in a category – review the expenses to see if the overage is a one-time occurrence, if you need to cut purchase,
or if you need to reallocate your budget.
g. Begin an emergency fund in a savings account or money market. Your goal should be 3 – 6 months of expenses.
h. Don’t forget to pay yourself for your retirement accounts.

Don’t have “frugality planning” problems, but you simply don’t like to budget? In this case, you probably don’t live over your means and you likely have good financial discipline. For you, paying yourself first works the best. Have automatic deductions established for your emergency funds, and for your retirement accounts. Then, live on the remainder of your income. People in this category find it works well for them.

During tough times like these everyone should consider “frugality planning.” Certainly, in better economic times, people should still be careful with their spending, but tightening up is critical during potential or real recessions – or unfortunately, when divorce may be looming.

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