By Chinkee Tan
So we have been talking a lot about saving, how beneficial it can be to our financial journey and how to go about it.
And you’ve probably also heard budgeting being mentioned a couple of times. Budgeting is one specific and effective way of improving our savings.
Many people have understood the concept of saving yet failed to succeed simply because they fail to grasp the idea of budgeting. And because budgeting is one important component of saving, it has a lot to say about the success of our saving habit.
For starters, there are four things we need to keep in mind when it comes to budgeting:
1. Understand the concept of budgeting
Most people see budgeting as a restriction, much like when one goes on a food diet. You write down everything you can and you can’t eat, but we all know that the most effective type of diet is moderation.
A crash diet can cause a lot of terrible things on your health as much as a crash budget can cause financial disaster!
A budget is not a restriction. Rather, it is a mechanism for building our future. Budget is simply a way to understand, analyze, and control our money.
When people see it as a restriction, it is when they dread to consider to budget their money because they think that they are being controlled by their money rather than being the one controlling it.
We need to think of budgeting as creating something for ourselves rather than restricting ourselves.
2. Look for more practical ways that can help you with budgeting.
People have different approaches to budgeting.
For people who dislike manually writing and tracking down their expenses, they choose budgeting apps that can help them with budgeting. There are, however, people who find spreadsheets and manual tracking down of expenses as still helpful ways of budgeting their money.
Find one that suits your needs. These budgeting apps and manual tracking of budget allows us to analyze our money, break it down into little categories that can help us understand our spending habits and needs. Similarly, they also set goals into a much more constructive and long-term way.
3. Start allocating your money
The most common rule in breaking down money is the 50-30-20 rule. This is a very simple and general way of breaking down money and can be very helpful for starters.
Essentially in this rule, 50 percent of the after-tax income goes to the basic monthly needs, such as rent, car, groceries, and bills. Thirty percent then goes to the flexible spending.
Flexible spending depends on the expenses that are considered important but can essentially be delayed or held off. For instance, if someone is not too particular about eating out or entertainment but considers a gym membership as something really important, then he or she can allocate that to flexible spending budget.
That’s where the 30 percent goes, it’s more of a discretionary type of expense. Then the 20 percent goes to savings. There are a lot of types of savings, it’s not just simply a huge bowl where we throw in the money. It can be anything that you’re not spending on yourself in the immediate because it’s going to bigger and longer term things like investments or retirement savings.
4. Know where to put the money that is being budgeted
When it comes to where we’re supposed to put the money that is being budgeted, there is a simple pyramid that we can follow. The topmost portion of the pyramid goes to the money that is not readily accessible, example would be our checking account. Putting money here allows us to budget in a way that we are not consumed by the idea that we have a readily available and accessible budget.
The trick is getting ourselves into a bit of a hassle to access the money before getting it.
The second part of the pyramid goes to the savings account which includes the emergency fund which is a three months worth of total living expenses. This, by the way is a non-negotiable aspect of your savings and financial life, this is the reason why it is called an emergency fund.
Also, the reason for placing the emergency fund under a savings account is that it needs to be liquid in case of emergency. However, it shouldn’t be too accessible to spend as well.
The second to bottom part of the pyramid is the semi-liquid accounts which are great for medium-term savings. These types of accounts usually have limits on how they can be available for access, therefore, it is a good way to make money grow.
And the most bottom part of the pyramid is the long-term investments which can include the retirement account or mutual funds.
Our budgeting pyramids may look different from everyone else but this is a sure way of allocating the right amount of money for the right purposes and uses. Budgeting is not only a very helpful tool but it is also something that allows us to have control over our money and our lives. We can shape it into how we want it to look like.
THINK. REFLECT. APPLY.
Why is it important to know where to put the money that you are budgeting? How is budgeting helping you in terms of growing your money? What are other ways that you can make budgeting more fun rather than being restrictive?
“A budget tells us what we can’t afford, but it doesn’t keep us from buying it” – William Feather