Frugal planning. . . .

J.D. at Get Rich Slowly wrote a post yesterday about Mary Hunt's'Freedom Account' strategy, in which we estimate our average yearly costs for vacations, auto maintenance, Christmas and birthday gifts, and any other irregular costs. Then the idea is to set up a separate account and deposit 1/12 of those estimated costs into it each month---then those bills are covered with cash, rather than credit.

It's a great idea (although I would prefer to use ING subaccounts for this, instead of keeping track separately in an Excel spreadsheet). Actually, I already do this with my tuition, auto insurance bills, and have considered starting a 'fun money' account as well. However, J.D.'s post also reminded me of something I've been meaning to write for quite some time, about the importance of planning when attempting to increase frugality and decrease spending.

For example, last weekend I agreed to fly to California this summer to visit with family. At the same time, I know that my parents and a good friend (my former shopping buddy) are going to visit me near the end of August. Since I know these visits will increase my spending this summer, I'm going to budget for them NOW. I have three months to plan for these extra expenditures---so they'll be going into my zero based budget---and I'll create a new ING subaccount specifically for travel and summer guest costs. Looking to the future, estimating your expenditures, and planning for them are all essential to living within your means.

If you haven't created a budget yet, I encourage you to do so! It has made all the difference in finally turning my spendthrift ways into save-thrift ways. Here are some steps to ponder as you consider creating a budget:

Gather every financial statement you can. This includes bank statements, investment accounts, recent utility bills and any information regarding a source of income or expense. I looked back through six months of online bank and credit card statements (that was painful). The key is to create a monthly average, so the more information you can dig up the better.

Record all of your sources of income. If you are self-employed or have any outside sources of income be sure to record these as well. If your income is in the form of a regular paycheck where taxes are automatically deducted then using the net income, or take home pay, amount is fine.

Record this total income as a monthly amount. Create a list of monthly expenses. Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes a mortgage payment, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, auto insurance, retirement or college savings and essentially everything you spend money on.

Break expenses into two categories: fixed and variable. Fixed expenses are those that stay about the same each month and are required parts of your way of living, like mortgage or rent, car payments, cable and/or internet service, trash pickup, and so on. Variable expenses are the kind that will change from month to month and include items such as groceries, gasoline, entertainment, eating out, and gifts to name a few.

Total your monthly income and monthly expenses. If your end result shows more income than expenses you're off to a good start (I started last October by using 106% of my total income!) If you're spending lessthan you earn, this means you can prioritize the excess to areas of your budget such as retirement savings or paying more on credit cards to eliminate that debt faster. If you are showing a higher expense column than income it means some changes will have to be made.

Make adjustments to expenses. If you have accurately identified and listed all of your expenses the ultimate goal would be to have your income and expense columns to be equal. This means all of your income is accounted for and budgeted for a specific expense (this is the theory behind the zero-based budget, after all). If you are in a situation where expenses are higher than income you should look at your variable expenses to find areas to cut. For example, I cut cable, my gym membership, and my cellphone service drastically, saving over $100 a month.

Review your budget monthly. It is important to review your budget on a regular basis to make sure you are staying on track. After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve. Each month you will remember new 'regular' but variable expenses, like your best friend's birthday or the average number of wedding gifts you're expected to purchase each year. Add these into your variable expenses (I like to have separate sub-accounts for things like this----meaning an extra line in the budget as well).

The point of all of this is, if you're willing to look 6 months or even a year into the future, you can effectively budget for all of those expenses that normally sneak up on you and generally result in a credit card moment. Planning is the key to frugality, whether it's at the grocery store, at the gas pump, or at the mall. It's those unplanned, last-minute expenditures that will ruin your budget in the end, so make sure they're accounted for months in advance!

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