Every year problems of debt and overspending frustrate many American families. Spending less than you earn is the foundation that creates the capital for investing and wealth building.

Being frugal results from tracking your spending, analyzing your spending, creating a budget, and living within that budget. The process becomes cyclical because tracking and analyzing your spending make you aware of waste which cause you to adjust your budget to eliminate them.

Budgeting works similarly to diets that require you to record your calories. They make you stop and consider the question, “Do I really want to spend my money in this way?”

Living on a family budget

Get the whole family behind the budget. If a budget isn’t a team effort, one member of the family will hold the purse strings and everyone else will be resentful. Teach these principles to children as young as four years old and use them yourself. It’s never too late to start budgeting – there are 40 year old adults who still do not understand them.

1. Live within your means. Spend less than you earn. Save 10% of your income. Compound interest make every dollar saved today much more valuable than dollars you will save tomorrow.
2. Spend money in accordance with your values. Make a list of your financial goals, prioritize them, and see whether you’re really buying what you think is important.
3. Delay purchases. When you see something that you want to buy, wait a week before you buy it. If you still aren’t sure, wait another week. A lot of the time, you won’t remember what attracted you to it in the first place. Waiting to buy can give you the benefit of hindsight in advance.
4. Develop a positive way of rewarding yourself. People who are overweight often reward themselves with food. People who are financially overextended often reward themselves by spending money. Develop the habit of rewarding yourself with something less expensive like jogging, a bubble bath, a walk in the woods, an hour of reading, or a set of tennis.
5. Make do. Imagine a $100 appliance that is replaced every five years. The family that makes do with the old model and only replaces the appliance every seven years will be able to save the difference. After thirteen years, their savings will be earning enough to pay for the appliance every five years. Being frugal early in life produces great wealth later on.

Reducing your budget spending

Reducing your spending is never an easy task. Slow and steady wins the race, so pick one area each month to examine and change what is possible.

1. Reduce fixed expenses. Many people make the mistake of thinking that fixed expenses are truly fixed. Usually they are not and when you reduce their cost, you save money every month without even noticing it. Do you really use all those features you pay for on your telephone? Renting movies can be cheaper than paying for cable? Switching car insurance could save hundreds of dollars a year.
2. Don’t eat out. The average family spends 6.1% of their income on eating out. For many people, eating out is a reward for working hard all day. But if you are having trouble saving 10% of your income, this one lifestyle change could change your financial outlook.
3. Create a budget category called “Big Expenses.” This category is for every item that costs more than 0.5% of your total annual budget. This forces you to save toward your big purchases and to sort out which big purchases are important and which can wait until next year.

Delayed consumption is the source and definition of capital. Delayed consumption is what will help you invest, let your savings make more money for you with compound interest, and help you gradually grow rich.

We have many sample budgets to get you started.

This article was originally published May 29, 2002. Photo used here under Flickr Creative Commons.