Wednesday, 28 August 2013

The Frugal Route out of Debt (Part 2)

Working Out Your Own Budget

(Part 1 can be found HERE)
Once you have estimated the amount of money you have coming into your household and have deducted everything that needs to be paid to sustain your accommodation, protect your income and get you to work on time, whatever is left is you basic household budget.

It costs money to be in fulltime employment. You could have expenses such as travel, childcare, lunches, workwear and additional grocery costs if your working hours inhibit you, timewise, from cooking and keeping up with the running of a busy household. All of these things eat into your income, so don't forget about counting up all those costs - it costs you to work.

Whatever you have left, after paying for your work-related costs and the actual roof over your head, be it rented or mortgaged, is what you have remaining to pay everything else. I count Council Tax as being part of keeping the roof over your head.

This is an example list of items that may need to be paid from the household budget:

Groceries
Toiletries
Cleaning products
Electricity
Heating (coal, logs, gas, oil etc)
Internet
Telephone
Mobile phone
Television licence
Shoes
Clothes
Gifts for others
Membership fees
Car
Insurances

Pets

In addition to the above, you might also have luxury expenses like:

Satellite television
Socialising
Entertaining
Hair styling
Makeup
Beauty therapy
Gym
Hobbies
Tobacco products
Alcohol
Travel & holidays
etc, etc, etc

Separating the needs from the wants, or the necessities from the luxuries, is what has to be done until such times as you are standing on your own feet financially. As long as you have debts of any description, your household is not financially independent. Even a mortgage is debt, although many overlook this fact. (You can't simply stop paying a mortgage and expect to keep the house, can you?)

So, this gives you an idea of where your money goes, after you have calculated how much of the stuff you actually have.

Step 1 - Work out your true budget

Step 2 - Work on those figures until you have a plan showing that you can afford to pay for everything from that amount. It's what's know as living within your means

Step 3 - Have some sort of contingency plan that will help counteract any sudden loss of income, especially if you have debt of any description. Clearing the debt is the obvious choice before any sort of savings pot can be afforded. Even saving loose change in a pot should be avoided, as every spare penny should be thrown at debts until they are gone. However, for the sake of sanity, some people prefer to save something, somewhere and there's no getting away from that fact.


As you have seen from Part 1, the magical figure of £4,000 or thereabouts keeps springing up, hence the reason I have always based these challenges on that figure. To this day, I still use the same figure and I still run my personal challenge as 'Living on £4,000 for the year'. This, I can tell you, would be far easier if I lived in a less rural area.

According to the www.minimumincome.org.uk website, as linked to the Joseph Rowntree Foundation, I need to earn £320.83 per week to lead what is perceived as a normal lifestyle. Well... you all know what I think of that! The suggestion that I should be spending £50.11 weekly on food alone had me laughing myself to sleep last night. (My average spend is less than £10 per person despite not having easy access to supermarkets.)

In conclusion, I can say never trust figures you read or hear from third parties unless they are calculated using your personal figures.

Year 1 of your new challenge to follow some frugal living techniques will always be the most difficult.

Having worked out what you think your budget should be, you now need to keep records and receipts for all spends, so you can compare these after the first year to the figures you had estimated.

Spreadsheets are great for this purpose, as you can input all your figures and calculate spends as the days, weeks and months progress. If you spot an overspend in one category, it allows you to reassess your figures and make some cuts elsewhere to cover those additional costs incurred.

Get a very basic free spreadsheet from our 'handy links' section in the frugal forums, or just ask in the members' daily thread, where someone will be able to point you in the right direction.

If you don't have any software for reading or working in spreadsheets, you can download the Open Office free suite of programmes, also listed in our handy links page.

Remember, every penny or pound spent has an overall effect on your entire budget, so it needs constant attention to keep it within its limits.


Join us in Frugaldom, take part in our challenges and see how quickly you can clear debts and pursue the route to a good life. It really is that simple and it can even be fun.

NYK in Frugaldom.
 

10 comments:

  1. Congratulations on writing this topic. Much more succinct than I would have managed. So far I am still on track with my budget and it looks like you are heading in the same direction. Yet again there was an article on Anglia news about pensioners incomes or lack of them. I could say a lot but would probably get myself into trouble so I will just say a very big thank you to the members of society who are working their little socks off to provide for us over pension age.

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    1. Thank you, Buttercup, I do tend to stay bang on track as best I can - the above was originally written in the 90's, when I first began setting these challenges, so I can see where the extras creep in and then cross the line from luxuries and into general day-to-day budgets. When I first began, very few people had mobile phones and even fewer had Internet. It's interesting looking back at prices, services and lifestyle trends - I love it! And having pursued the lifestyle for so long, I am happy to be debt and mortgage free - now I can begin to plan how to play a little more by way of bucket list #2. :)

      Thank you for posting and please do feel free to pop into the forums anytime at www.frugalforums.co.uk where some of us 'meet u'p on a daily basis.

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  2. Nyk you should be appointed Minister for Frugal Living. You could seriously help so many people.

    Sft x

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    1. LOL I have neither the money nor the media contacts to spread the word and I doubt very much if any country would want to admit to having a minister for frugal living. It's just a bit of a shame that there still seems to be a stigma attached to being a part of the frugal living challenge, so it's more like a secret service than a public service. :)

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  3. 2 brilliant posts that I will be coming back to again and again.

    Agree with SFT, you would be a great Minister!!

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    1. Absolutely no chance of that ever happening, I'm happy being a recluse and keeping churning out the same old stuff every other year. :) But thank you for your vote of confidence.

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  4. This is great! I would just add that for people (like me!) who need to save a little as well as have debt, an offset mortgage is ideal. OK, so this doesn't work if you have different types of debt, but my husband and I like to have savings that aren't immediately paying off the debt so that we could survive for 6 months (including the debt repayments) should the worst happen and we loose our incomes, not to mention as a safety net for things such as the car blowing up (sadly my distance from my work requires that I have a car or move closer to a city). The offset account provides the best of both worlds, as the money in the offset is our 'safety net savings' making us feel calmer, but means that the money is essentially already paid off the mortgage.

    Like I said though, it only works for the mortgage type debt.

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    1. Thanks Tonia. I never did get to grips with the whole offset mortgage thing, I don't think they'd invented them when I had a mortgage. Unfortunately, we all fell into the endowment trap. How does an offset work in the case of negative equity if you need to sell and downsize to stem a debt flow? Any ideas?

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    2. I think offset mortgages are really only available if you have an loan-to-value rate below 80% which would make the risk of negative equity low (although far from unimaginable as the recent financial crisis has shown in many areas). The offset account is simply a savings account that is tied to your mortgage, but you have instant access to all the time. Instead of earning interest on the savings you don't pay interest on a portion of your mortgage equal to the savings. So for example if you have £50,000 mortgage, normally you would pay interest on all of this. With an offset mortgage with £1000 in an offset account you pay interest on only £49,000 of the mortgage. Doesn't seem like a lot but my husband an I have already taken 1 year off our 25 year mortgage by saving just a small amount in an offset in 6 months! Incredible!

      The big benefit, which is where I hopefully will answer your question about downsizing, is that you can do what you want with the money. So for us, if everything goes swimmingly (hah!), and we keep that money and add to it, when we remortgage/downsize we can use the savings to pay off some of the mortgage or other debts (we could pay off other debts right now, but then wouldn't have our 'safety savings'). But until we actually do that we can take the money out at any time and do what we want (albeit in the knowledge that we will then pay more interest long term). Does that answer your question?

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    3. Thanks Tonia, that does make sense as long as you don't mind having the debt in the first place. I think I've become averse to anything debt-related, hence my limited knowledge of how repayments and offsetting actually work. I don't really understand why anyone would want to keep savings when they could pay off debt to avoid paying any interest, yet I do understand the need for a safety net. My brain hurts even thinking about folks who can now, apparently, extend their mortgages to 40 years. That was unheard of when I was living in my mortgaged and then remortgaged house. LOL

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