Budgeting is the process of creating a plan to spend your money. Are you the type who spends lavishly at the beginning of the month when you get your salary and declare you’re broke by the middle of the month? Or the type that spends carefully and has some savings and a little extra to spend on things you love?
Creating a spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. This is the first step to ensuring you don’t spiral into credit card debts and fall into the trap of applying for new credit cards to pay for other credit card debts.
There is always news about lottery winners striking a fortune and ending up living in poverty again soon after because of splurging. Even a celebrity like Lady Gaga fell into a USD3mil debt and declared herself bankrupt after her Monster Ball tour. Crazy but true! These unfortunate events happen because of a lack of money management skills which includes budgeting.
Some very successful people that I come across have ‘gamified’ their budgeting process where they detail all their expenses on a spreadsheet and they get a kick whenever they find savings in their daily purchases. Call them nerds, sticklers or whatever you wish, these guys are very much in control of their finances and make very sound investments.
What are the basics of budgeting?
I like the basic rule of dividing up after-tax income and allocating it to spend it this way:
50% on NEEDS – Housing, Food, Transportation, Medical Insurance, Essential debts (student, property & car loans), Offering to parents, Donations to NGOs
40% on SAVINGS & INVESTMENTS – Emergency fund, Self education, Entrepreneurship/Starting a business, Stocks, Exchange Traded Funds (ETFs) Private Retirement Scheme(PRS), Unit/ Mutual funds, Employees Provident Fund (EPF)
10% on WANTS – Restaurants, Entertainment, Vacation, Luxury purchases
Make it your new challenge to budget and see where it takes you. I find a spreadsheet of in and outflow expenses is a good place to start and sustain. Using cash instead of credit cards will increase awareness of your spending however that also means you are not accumulating reward points.
If you think 50, 40, 10 is too drastic, work out a more suitable budgeting ratio for yourself and work your way up, or find ways to increase your monthly income! Contact me if you’d like more guidance!