Personal budgeting techniques that really work
Creating a financial plan that ensures that you spend less than you earn and also save some money every month should be simple enough. But for many people this is a difficult task.
Practically everybody realises that it is important to draw up a budget and monitor your spending according to it. In fact, most people start quite enthusiastically and make a note of every little expenditure that they make. But this zeal is usually short-lived. They soon revert to their old ways and spend without keeping track of how the expenditure that they are making fits into their overall plan.
How can you make a budget that is easy to follow and which you can stay with over an extended period?
Unfortunately, there is no simple answer to this question. You have to arrive at a set of techniques that you are comfortable with. The trick is to be flexible and to try out different methods till you find one which works for you.
Here are some points that could help you succeed in your budgeting exercise:
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1. Don’t roll over your credit card debt
At the end of March 2017, the total credit card balances that Singaporeans had rolled over was in excess of S$5 billion. Credit card debt carries very high interest rates. The standard interest rate for a DBS Bank credit card is 25.9% per year. OCBC charges a similar rate.
If you are carrying any credit card debt, the first step that you should take is to make a plan to pay it off. It may not be possible to do this in a single month. Draw up a repayment schedule that allows you to clear your credit card outstanding over the next three or six months.
During this period, you should not divert any of your income to savings. Your top priority is to liquidate the sum that you owe on your card.
Why shouldn’t you save during this period? Any financial instrument that you invest in will not give you a return that is even a fraction of the rate that you are paying your card issuer. Remember that the correct approach is to divert all your surplus cash to get to a “nil” credit card balance.
2. What is your income and how much do you spend?
The first part of this question should be easy to answer, but calculating your expenditure could be more difficult. Most people underestimate the amount of discretionary expenditure that they make. Transportation costs, eating out, and expenses over the weekend can add up to a significant amount over the month.
Although it can be tedious to track every small expenditure that you make, you may want to do this for a week or a month to get an idea of where your money is going. To make your task easier, you may want to use a budget calculator.
There are also a number of apps that you can use to monitor your expenses. Seedly is simple to use and works by importing data from your bank and credit card issuer and aggregating it under various heads.
Once you have tracked your expenditure for some time, you can sit down and consider if all of it was really necessary. It is likely that you will be able to identify some areas that you can cut back on without much effort.
3. Save at the beginning of the month
No budget is complete unless you plan to allocate a part of your income to fund your retirement expenditure. How much should you deploy in long-term savings every month? While the amount could vary depending on how much you earn and your expenses, you should save at least 20% of your income.
The mistake that many people make is to defer this activity till the end of the month. The idea is that by this time you will know the surplus amount that you have left over after all your commitments have been met. You could even have a situation where you would be able to save more than 20% of your income!
Unfortunately, in most instances, it doesn’t work like that. Your bank balance could be totally depleted by month-end. Even if you do have some cash left over, it could be less than the targeted 20%.
The correct approach is to put money aside at the beginning of the month. This will ensure that you don’t deviate from your plan.
4. Do you have an emergency fund?
It is practically impossible to anticipate every type of expenditure that could arise. You may need money to meet a medical emergency or take an unplanned trip. This could throw your entire budget out of gear.
The way to handle this, is to allocate some money into an emergency fund. Don’t dip into this unless you really need to. It is also important to replenish it as soon as possible.
Having this money available will allow you to stay on track with your budget, even when some unexpected expense crops up.
5. Don’t do too much, too soon
Many people fall into the trap of trying to cut their expenditure drastically from earlier levels. This approach is likely to fail because it is impractical to expect that you can suddenly change your lifestyle.
It is far better to make small changes initially. A gradual reduction in expenditure is easier to carry out. You are also more likely to remain faithful to your budget if you implement it in a phased manner.
6. Spend some time ever week reviewing your progress
Your budget should be flexible and you should be willing to modify it as circumstances change. If you get a raise or receive a windfall, you don’t have to spend it all. Divert some extra money into your emergency fund. You could even consider allocating some amount to long-term investments.
On a weekly basis, monitor the progress that you are making. A regular review, especially in the initial phase, is essential if you want to meet your financial goals.