Saving Money Is Easy: A month-by-month guide to ditching debt and ensuri ng your financial future

GETTING STARTED

How I Became a Cheapskate

I haven’t always been a Cheapskate. Circumstances—and a desire to not live in a tent for the rest of my life—forced a change in my attitude to money.

Not so very long ago, I was a very happy and contented wife and mother to two small boys, working part-time and helping my husband renovate our house.

Then Disaster Struck. Within the space of five days we went from a two-income family of four to a no-income family of four with one on the way. To say I was stunned is an understatement.

We had the same living expenses as everyone else we knew and we lived a very good life. It came as a shock to me to realise that when the money in the bank ran out, that was it—we would be broke. Not just poor, but broke, with not a cent to our names. Not only would we not be able to maintain our standard of living, but we would most likely not even be able to live.

I liked our life and I certainly didn’t want to change the way we lived so I had to find a way to maintain our lifestyle and standard of living on a drastically reduced income.

It wasn’t easy at first. I had to learn to cook from scratch. Yes, I could grill a steak and toss a salad, and I could prepare a pretty good four-course formal sit-down dinner for 12. But when it came to baking, bottling and preserving, I knew almost nothing.

I had to learn to sew properly. Years of sewing classes in high school had given me nothing but a dislike of fabric, needle and thread. I learned to sew so I could dress my children and myself fashionably without spending even bargain-basement prices.

I learned to grow our own food. Until Disaster Struck, gardening, to me, was pots of pretty petunias on the verandah and borders of chrysanthemums along the fence. These days, the pots have garlic and parsley in them and the borders are cauliflowers and peas and celery and tomatoes and other yummy things.

I have been blessed with a mother who loves to cook and sew and knit and garden and even clean. Mum can give instructions on how to set in a sleeve over the phone and not think twice about it. My three favourite aunts are all talented cooks and homemakers and bargain hunters who have never been afraid to share their knowledge with me. My mother-in-law can stretch a dollar until it screams and do it with a smile on her face, and she too has shared secrets to frugal living with me.

I will admit to having always loved a bargain. My friend Deirdre used to say I was the only person she knew who could see a ‘Sale’ sign two blocks away. I remember being taken to factory sales (back in the days when they were really at the factory) and waiting in line for what seemed like hours so Mum could pick up a few bargains. Each winter I still wear a coat that I picked up from an outlet sale for $50 when it was $300 in the shops.

But I haven’t always been a Cheapskate: living the Cheapskate’s way developed over time. It wasn’t an overnight transformation (although we would have been so much better off if it had been) but a gradual thing. We didn’t make any huge changes, but lots of small individual adjustments that added up to thousands of dollars saved every year.

Some of the changes didn’t quite work the way I thought they would. Making my own paper was a disaster from the beginning—it cost more in materials and time than I ever would have saved. And I have served some memorable dinners (one particularly awful salmon dish springs to mind) in attempts to save some money.

I don’t believe in living miserably and going without things we need or want just to save money. I don’t believe in saving money just to die with a huge bank balance. I do believe in not spending money on things that aren’t important to us so we have the money to spend on the things that are.

These days money isn’t so tight, but our budget still is: we haven’t changed it much since we began this journey. Expenses have increased in some areas and decreased in others. I have become better at finding bargains or making what we want. We have more to share than ever before.

And life is good.

Re-discover Your Money with a Spending Plan

I used to think nothing of eating lunch out a couple of times a week, meeting friends for coffee every morning and buying the kids a treat each time we went out. We lived well, but we had little in the bank and no Emergency Fund or Peace of Mind Account, so when Disaster Struck, our vision for the future changed. Drastically.

We had never had a written Spending Plan before, so we sat down with an exercise book and pen and worked one out.

Your Spending Plan can stretch your family’s finances and help you live life debt free, cashed up and laughing. A Spending Plan helps you see how to use the money you have to pay bills and get more of the things you need and want. It lets you decide what is important to your family and make choices before spending your money.

Getting into the routine of your Spending Plan will give you control of your money. You can see at a glance how much comes in and when, and how much goes out and when. Your Spending Plan will be working for you, giving you peace of mind and leading you towards that light at the end of the tunnel.

For beginner budgeters, using a spreadsheet—or even a ledger—to develop a Spending Plan can seem overwhelming and way too hard. An easy way to create a Spending Plan and keep it updated is to use the envelope system. This was developed back in the olden days, before PCs and spreadsheets, but it still works today and is just as efficient a method of budgeting as a computerised program.

The instructions below are for working out a monthly Spending Plan. If you prefer to use a fortnightly or weekly Spending Plan, adjust the amounts accordingly: for a fortnightly Spending Plan, divide the total by 26 and for weekly, divide by 52.

To get started you will need:

a box of plain envelopes

pens

a calculator

as many receipts and invoices from the last 12 months as you can find

pay slips for the past 12 months

bank statements for the past 12 months

Step 1: First you are going to work out how much you need to put aside for all your fixed bills. Gather all your regular bills (gas, electricity, phone, Internet, insurances, car registration, rates, mortgage, school fees, bus fares etc) for the last year so you can work out how much you need to cover these regular expenses. For a monthly Spending Plan, add all the amounts for each bill for the year and divide the total by 12 to give you a monthly total. This is how much you need to be putting aside each month to cover the bill when it comes in.

For us, a family of five, with three members being teenagers, we need to put aside $1084 a month to cover these expenses. Each month this amount is automatically transferred to our Living Account.

Step 2: Now you can work out how much you need to cover other flexible expenses (petrol, food, clothing, medical, chemist, birthdays, Christmas, holidays, hobbies, club memberships etc). Calculate the amount you need to put aside the same way you did for your fixed expenses.

This is the area that will help you get your finances under control, as it is the flexible expenses you control. Hopefully your fixed and flexible expenses, when combined, will be less than your income for the year. If they’re not, you’ll need to take a look at the flexible expenses and make some cuts.

You may need to temporarily suspend pay TV, switch to a lower phone plan or cut gift spending, to get the expenses under control.

For our family, we need to put aside $1107 a month for these expenses (this amount includes our food, clothing, sport, music, petrol, stationery, school extras etc, and our Mad Money).

Be sure to give yourself some Mad Money, even if it’s just $5 a month. This is important because you can spend it on whatever you want without having to be accountable and without it affecting your Spending Plan.

Step 3: Set up a bank account for your Living Account. This is where you will deposit the money for your fixed expenses. You can set up direct debits for most of your fixed bills, saving you the temptation of handling the cash.

Step 4: For your flexible bills, label your regular-sized envelopes with all the things you spend cash on e.g. food, petrol, chemist, tuckshop etc. On payday, withdraw the total amount you need for these expenses in cash. Deposit the budgeted amount into each envelope and write the date and amount on the front of the envelope. This is the money allocated to that category of your Spending Plan for the month.

When you go grocery shopping, take the money from the grocery envelope. When you get home, make a note of how much you spent on the front of the envelope and put the change and the receipts into the envelope. Don’t leave them in your purse!

Each time you make a withdrawal (i.e. take some cash from the envelope), subtract it from the deposit total. Once the balance on the envelope is at zero, that’s it—no more spending from that envelope or category of your Spending Plan.

You may find that you will often have money left over at the end of the month. If you are paying off debt then use it to make an extra payment. If you are building an Emergency Fund, add it to that. If you are debt free and have a healthy Emergency Fund, use the money to save for something special that you want (a holiday, house renovations, new car, weekend away).

The envelope system of budgeting is very simple and easy to use, and really very efficient. Knowing you have the money sitting in your Living Account for fixed bills when they come in and the cash to pay for those flexible expenses takes the worry out of wondering if you’ll be able to pay the bills when they come in.

Guaranteed Peace of Mind

You’re holding your own and the Spending Plan is working out. That is until, out of the blue, Murphy comes calling and you need to replace the fridge. Or Junior’s orthodontia bill doubles due to the genetic overbite you didn’t know he had. No worries, that’s what you kept your one and only credit card for. Problem solved.

Wrong! If you don’t have the money to buy your new fridge (or pay the orthodontist) then you don’t have the money to pay off the credit card bill at the end of the month and you are back on the debt cycle again. Unexpected expenses like these aren’t really unexpected. You have always known that at some stage you would need to replace the fridge. Chances are you’ve known for a few years about Junior’s upcoming braces ordeal. The problem was that you didn’t allow for these irregular expenses in your budget.

The peace of mind you thought you had has gone. In its place is the stress you used to feel when you were trying to pay the bills at the end of the month.

What you need is a Peace of Mind Account. Your Peace of Mind Account is where you deposit regular amounts to cover irregular expenses: furniture replacement, emergency medical expenses, unexpected car repairs etc. Depositing regularly lets the balance build up so that when Murphy calls, you can cover the expense without having to thaw out your credit card.

A Peace of Mind Account isn’t complicated or hard to use. It does, however, give you a sense of security and that peace of mind I keep talking about. I suggest that you open a separate account, either online or at your bank or credit union. Look for an account with low or no fees that allows you to transfer money between your existing accounts. As you are going to be building the balance up, look for an account that pays interest.

Once you have your Peace of Mind Account set up, sit for a few minutes and think of all the irregular expenses you have had or could possibly have: car repairs, plumbing problems, unexpected medical expenses etc. If you have the information, jot down roughly how much each one was. While you’re thinking and jotting make a list of all the other expenses you’ve had in the last year that weren’t covered in your Spending Plan: family weddings, surprise trips, school camps, birthdays, Christmas (yes, there are some who don’t budget for this), crafts and hobbies etc.

Take your list and work out how much you need to add to the Peace of Mind Account each week to be able to cover these expenses when they crop up. For example, your new fridge cost $1200. You have a two-year warranty on it, so hopefully you won’t need to replace it for at least two years. To be able to replace the fridge when it expires you need to add $11.50 a week to your Peace of Mind Account—$1200 divided by two years is $600, divide that by 52 weeks and you get $11.54. School camps last year cost us $478 so I need to add $9.20 to my Peace of Mind Account each week to cover the cost.

It is essential that you track what’s going in and out of this account and keep a record, so you’ll know if you have the money to cover an irregular expense when it crops up. I use an exercise book with one item to a page. Each item is an irregular expense and its page is ruled into columns: date, transaction, deposit, withdrawal and balance.

It looks like this: