One of the best ways to take charge of one’s finances is by establishing a personal budget list. A budget list helps in controlling destructive impulse, on top of ensuring that an individual remains liquid enough to meet pressing financial obligations.
Financial obligations include personal loans, credit card debt and more.
Amidst the wildly fluctuating economy and news of the upcoming increment in goods and services tax (GST), budgeting can be a powerful weapon in self-guarding against financial defeat.
Put simply, a budget is a forecast statement of incomes and expenditure. A monthly budget allows a salary earner to plan his income so that it can last until the next payday. A healthy budgetary statement should also provide for more important items such as savings and investments.
Budgeting refers to the process of coming up with a budget plan. This allows one to predict their cash flows and determine where they will be able to settle their cash commitments down the road.
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Many have fallen into economic ruin by getting their priorities wrong. In economics, it all boils down to the ability to distinguish between needs and wants:
A need is something one must have (essentials such as food) whilst a want is something one would like to have (that new pair of shoes). While there is not much to do about needs, experts recommend reining on wants for one to meet their money goals.
1. Provide for emergencies: A budget allows one to save and invest. These two come in handy during a cash crisis or in case of emergencies.
2. Passport to Financial Freedom: If re-invested strategically, money saved from the budget can be compounded: meaning the investing party will still be earning on top of his monthly salary, providing better financial stability.
3. Promote Financial Transparency: A leading source of conflict among couples is money. By having a budget and sticking to it, spouses agree on how to use the funds and escape from frequent squabbles over cash.
4. Keeps one focused on the ultimate Prize: To achieve one’s set economic goals, a budget comes in handy by helping to veer one back on path amidst the endless temptations to spend on wants.
5. Move from Debt: People frequently fall in debt because of haphazard spending and the failure to properly manage their finances. A spending plan can, therefore, keep one away from debt or help those indebted to pay off their loans.
Budgeting is easier when one understands the type that works best for them. The most common types of budgets include:
In this, money is allocated to each category of expenditure. One should stop spending as soon as a certain envelope’s expense is exhausted. Envelopes can be created for clothing, groceries, fun money, eating out, cab fare or gas money, entertainment, household, and miscellaneous expenses. It’s a superb strategy for individuals who struggle with expenses.
This form of budget concentrates on financial goals. Generally, 50% of the after-tax income should go to basic needs, 30% to wants, and the last 20% on savings (investment) and debt repayment.
The savings should cater for long-term undertakings such as buying your own home or catering to your retirement needs.
For those who do not wish to create a budget list that is too complex, one might consider a 5-Category Budget: Spending is set for 5 basic categories such as housing, transportation and savings. One should then decide on the optimal percentage to expend on each group.
Ideally, housing, living, and transport expenses should not exceed 35%, 25% and 15% of total after-tax income respectively.
On the same note, 15% and 10% of the income should be devoted to settling debt and savings in that order.
This style of budgeting pays close attention to every single detail: one budgets on how they will use each and every penny up to the last dollar (coin).
It should again include all essentials like savings, food and transportation. This goal of this method is to ensure that every single cent is accounted for.
Once you have decided on the method of budgeting that works best for you, it’s time to put it into action:
Step 1: Note the income(s): Those should be after tax and your CPF deductions.
Step 2: List down all the expenses:
Capture all the fixed expenditures first (rent, mortgages, car repayments, etc.) then the variable items (groceries, entertainment, gas, etc.).
Step 3: Prioritize spending: The needs and wants should be treated differently here.
Step 4: Set financial goals:
Ambitions such as retirement, debt repayments, an emergency fund, or house payment should now be incorporated in the 20% relevant envelope or category – similar to ‘wants’.
Step 5: Automate and Track everything
A budget is only useful with proper monitoring. One can feed the proposed plan into a budgeting mobile app or an excel sheet to be able to keep track of their expenditures.
Budgeting is a masterful tool for anyone seeking to take charge of their money. Whichever the type, a budget can enable an individual to achieve financial freedom, rein on spending, and swiftly come out of debt.
With many budgeting apps and spreadsheets available, the whole process should be efficient and seamless.