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A framework for frugality

Austerity is in the air and many of us in the Great Indian Middle Class are realising that this time, it's different. What is the best way to ride out the recession? Dhirendra Kumar writes.

business Updated: Sep 28, 2013 23:19 IST

Austerity is in the air and many of us in the Great Indian Middle Class are realising that this time, it's different. What is the best way to ride out the recession?

The jobs and earnings squeeze is upon us in earnest. While there have been many periods of economic downturns in the last two decades, the current one has had the worst impact, and on a larger set of people. There are many reasons for this, not the least being the large EMI load that Indian families are labouring under and the raging consumer culture that has gradually become the norm.

The difference from earlier periods has been that to many people who are getting squeezed, pessimism seems like the realistic choice. Many of us in the Great Indian Middle Class have come to the realisation that this time, it’s different. The days when better jobs were there for the asking and annual salary hikes far outstripped inflation are gone, if not for ever, then for a very long time indeed. It’s not a time for extravagance. Quite the opposite, actually.

Austerity is in the air, and has been for a few years now. Recently, the Government of India has also reiterated that it shall live austerely, something that it does every year.

In the dictionary, Austere is defined as an adjective with two (related) meanings. 1) Severe or strict in manner, attitude, or appearance, and 2) Having no comforts or luxuries; harsh or ascetic.

Are you in for a harsh and ascetic life? That’s a depressing thought, so let’s settle for a different word, ‘frugality’. It’s dictionary meaning is ‘prudence in avoiding waste’. Austerity sounds like a punishment, while frugality sounds like good sense, something that will lead to an improvement eventually.

The distinction is important, even in practice while you’re trying to cut expenses. When their earnings get squeezed, one sees far too many people flailing about trying to spend less, without any plan. They go to a vegetable shop and will randomly buy something a little less expensive. It’s probably just an empty gesture. If you’re trying to impress yourself with the idea of spending less then it’s fine but you may or may not know whether it’s material.

Like, when the phone is fully charged, there is a message asking you to remove the charger from the wall socket to conserve energy. People will piously do that and feel that they’ve done their bit for the earth, while turning the AC colder than it needs to be or letting the geyser running a little longer than necessary.

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If they looked at the numbers, they’d know that the trickle charge from a phone charger (typically 100 mW) is 13,000 times less than the rate at which an efficient room AC consumes power (typically 1300W). So one extra hour of an air conditioner is the same as about one and a half years of the phone charger being left on. The moral of the story is that unless you are measuring things, don’t even bother, you're likely making an empty gesture.

By the numbers
To be effective, frugality has to be driven by the numbers — it has to be quantitative. Ben Bernanke has his Quantitative Easing and we must have our Quantitative Frugality. Which sort of makes sense because it’s entirely possible that our quantitative frugality is ultimately a by-product of Bernanke’s quantitative easing. The first principle of frugality has to be that unless we measure what we are spending and plan what, where and how much to cut, any attempt at spending less can’t be optimised. It doesn’t make sense to just spend less, the idea is to optimise expenditure.

The first step in being frugal is to see how much you are spending money now and what are you spending it on. This is actually not a straightforward, because what matters for our purpose is the goal of an expenditure, rather than it’s actual nominal head. For example, you could be spending Rs. 6,000 a month on fuel and that’s what you’ll write in your budget if you just scan your bills and your card statement to see where you are spending it.

However, to be frugal we need to know how much of it went into commuting to work and how much for those drives down to the local market every time you remember to make a little purchase. It’s like the difference between an accountant’s approach and a CFO’s approach.

While this sounds like a lot of complexity, this is the one step where technology can really help you. If you use a smartphone, get an expense tracking app. If you think it’s too much of a chore to enter expenses every time, then set an alarm and do it at day's end. If the smartphone keyboard is slow and painful then use a computer spreadsheet or just a paper diary, but don’t miss this part. Remember, it’s far more important to be regular with tracking than it is to be precise. It doesn’t matter whether that fast food meal was Rs. 381 or you vaguely recall Rs. 400. The important thing is to record it and to mark it as something that was not needed.

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The interesting part of this goal-based tracking is that it makes cutting expenses automatic. Once you’ve done this for a month, and classified everything both under heads (like rent, EMIs and other debt, food, entertainment, eating out, durables, transport etc) as well as under the need or utility level, your frugality framework is almost ready. This — putting down what you spend on and WHY you spend it — is the hardest part of being frugal. Believe us, if you could get this done, almost any urban middle-class and above Indian family could save maybe 10% without all that pain. Not knowing why you are spending is like leaving money lying on the road.

You should be able to classify everything under two types of expenses. There will be the big non-negotiable items, EMIs and education. There will be the simple straightforward savings that will suggest themselves automatically. Less eating out, no holidays, cheaper consumables and such. If you’re lucky then the potential savings from the simple stuff will appear to be enough for the quantum by which you’d like to reduce expenses.

However, you are probably letting an opportunity go by. Who knows what the future holds for the Indian economy. It might be better to make that extra effort, cut more and add something extra to your savings.

While this may look hard at first sight, you should try out a budgeting technique that businesses use sometimes (and we wish government would use), but which households never do. This is zero-based budgeting. Normally, one sees what one spent on something earlier and tries to figure out what to cut.

In zero-based budgeting, you start as if you are not spending anything and carefully examine the logic of each expense as if you were adding it afresh — doing it for the first time. This could yield some fresh thinking on big-ticket expenses that look unshakeable. You could be paying Rs. 40,000 for rent but if you were to start looking for an accommodation today, would you still spend that much? If circumstances demand it, wouldn’t it be much better long-term if you made the effort now to find a cheaper house? Or buy a small house instead of waiting to earn enough for the dream house?

To sum it up, our goal here has not been to give you some tips and tricks. Those you can think up yourself anytime. The important thing is to approach the task of being more frugal systematically, and to embrace it wholeheartedly. Unlike compulsive austerity, it’ll actually lead to less stress and more happiness.

Coping with the financial crunch
Financial stress has taken a widespread toll on Indians of all strata of society. As many as three-fourths of the people surveyed by HT-C fore have said that they have had to rethink their financial goals.

One fourth of surveyed are paying EMIs with housing loans being the main driver of indebtedness. It’s little wonder that economic growth is decelerating — almost everyone surveyed has curtailed expenses and about two-thirds are making significant lifestyle changes.