Step 2: Make a Frugal Budget
If you set a high value on liberty, you must set a low value on everything else.– Seneca
Hopefully you have been persuaded to avoid taking on any more debt, and you are now ready to ‘dig up’ instead of just ‘stop digging’. It’s almost time to make some real progress towards your financial freedom by saving and paying off any existing debts.
But you might still be wondering, how do financially secure people manage to live without credit, even if their income is similar to, or lower than, your own? How are they able to get to the end of each month with no debt, and even with some savings to add to the pile? Is there some trick to this that I need to know?
There is a trick to doing this, and you do need to know it.
The strategy is a brilliant, highly classified piece of financial wizardry. It is like the most awesome kung fu move you ever saw, where Bruce Lee flicks a giant, scary, boulder of a man with his little finger, sends him flying across the room, knocking over dozens of other villains, before finally crashing into a cabinet full of delicate glassware.
This secret of wealth and comfort was found hidden in ancient scrolls that had been stowed in a remote cave near the shores of the Dead Sea. Normally you’d have to attend an expensive, week-long workshop in order to access this profound knowledge, but today I’m offering it to you for no more than the cover price of this book.
This ancient, mystical wisdom is . . .
Spend less than you earn.
Just as eating more calories than you burn makes you fat, and eating less than you burn makes you skinny, the same happens with money. Here is the formula:
Spending > Income = Debt
Spending < Income = Savings
It continues to astonish me how many people fail to grasp this basic mathematical truth.
To paraphrase the famous Charles Dickens quote, happiness is an annual income of $30,000 and annual expenses of $29,999. Misery is an annual income of $30,000 and expenses of $30,001.
There are three ways to approach this formula. You can increase your income, decrease your spending, or both. This chapter will focus on the spending side of the equation, and Step 5 will focus on income.
The greater the gap between your income and spending (in the right direction), the more your financial freedom will increase. To expand the gap, you’ll need to figure out exactly where your money is going and look for areas to adjust. You need to make the invisible hole, visible.
You need to make a budget.
Only about a third of Americans have a household budget,[i] and this figure is likely similar in the other Anglophone countries. Those with higher than average salaries are most likely to budget. However, everyone needs to make a budget, however simple, in order to manage expenses and start nearing financial freedom.
There are two ways of starting a budget. The first is simply to record everything you spend for a month while remembering to factor in less frequent expenses such as car registration and Christmas shopping. You might do this by hand, or set up your own spreadsheet. Keep your receipts and check your bank statements to help you do this.
The second, easier method is to use a budgeting app to do much the same thing in more detail and with some built-in charts and calculators. There are many, many of these apps, and a lot of them are excellent. You can keep your phone with you and note down each transaction as you make it.
Two common and useful ones worth mentioning are Mint[ii] and YNAB.[iii] There are so many available that I could not possibly research them all – have a look around and find the one that best suits your needs. Some are purely budget apps, while others also help you to keep track of debts, investments, savings and so on – decide whether you want a simple one or a really detailed one. A simple one is fine for now but later on, when we’re looking at how to manage your investments, you might want to upgrade to a fancier one.
Writing down every single expense is a hassle so I highly recommend you use an app to save time, and also for the automatic statistics it can generate to quickly figure out where all your money is disappearing to. Why not? We live in the future!
Most of these apps have a free and a paid version. Try the free version first, and if the program suits you, consider shelling out. This would be a perfectly sound investment of your money.
Crazy as it may seem, the trick to getting value from these apps is to actually use them. You can download as many as you like, but unless you’re actually recording each transaction as you make it, you will get no benefit from it whatsoever. It would be like buying a home gym and then letting it gather cobwebs, wondering the whole while why your arms still look like noodles and your potbelly is unchanged. While apps have many advantages over pen and paper versions, or your own spreadsheet, there’s no point having any of them unless you’re going to regularly record your spending.
If you do use a budget app or equivalent diligently, after a few months you will have generated some powerful, potentially life-changing data.
Also available on many other platforms.