January 17, 2014

Finance Friday: How to Make a Budget Plan

Because we all need to plan our spending and saving!  I have yet to meet a person who doesn't want to save money. In fact, it is rare to meet a person who doesn't need to save money. Well, maybe Gretchen Barretto, but that's beside the point. I bet (metaphorically speaking) Henry Sy's grandsons also save money.

However, it is even rarer for me to find someone who is actually saving money - consistently, faithfully. More often than not, we do not have a lot money left at the end of the month. Instead, we have a lot of month at the end of the money.

Why? Because we fail to make a budget and keep it. I'm not at all a finance or a budgeting expert, but I've always been interested in budgeting. I've done this since I began earning money 6 years ago, and I find it therapeutic (just like writing and listing). Keep in mind, though, that making a budget is different from keeping it, but that's another topic for another day. Today, let me teach you how to make a budget plan.

1. Identify your sources of income.
The first thing you need to do is note your income, which we will later divide into categories. But before that, you need to answer this question: is your income fixed or not? If it is fixed, you also need to work with fixed amounts. If not, like mine, you can work with percentages, which are more flexible (except for the non-negotiables, which we will discuss later). If you have multiple sources of income, and praise God for that, identify all of them.

2. Note the fixed non-negotiables.
After you identify your income and whether it is fixed or not, begin listing your payables. Begin with the fixed non-negotiables. I am using this term loosely to refer to payables with fixed amounts and need to be paid regularly. For example, internet bills and mortgages incur the same amount every month. For both fixed and non-fixed income, you need to list these categories using fixed amounts. Here's an illustration:

3. Note the fluid non-negotiables.
After the fixed non-negotiables, you need to list the more flexible payables. Take note that this doesn't necessarily mean you can choose not to pay this category. I would discourage you from doing that. What I mean here are the payables without fixed amounts. Examples are tithes, donations, and savings for emergency and retirement funds.

Why would I discourage you from skipping this category? Many of us follow the notion of saving what is left from our salary. The formula we usually follow is this:

Income - expenses = savings

This is wrong, wrong, wrong! Ask yourself: when was the last time you were actually able to save somethibg from what was left of your salary? Usually, this never happens because before the month (or kinsena) ends, we've used up all the money already. Not incorporating a savings category into our budget is one of the reasons why we can't save at all. In contrast, the formula we should follow is this:

Income - savings = expenses

See the difference? Now, for people with fixed income, you should cite fixed amounts, too. However, for people without fixed income, I recommend using percentages. In my case, I usually allot 10 - 15% for savings no matter how much I earn. In tithing, a good guideline to follow is to give 10% of what you earn, but if you can give more.praise God! Here's another illustration:

4. Create a "debt" category.
If you have a debt or are paying something on credit or installment, create a new category for that. Cite the amount you need to pay per month plus the interest if applicable.

5. Create a "flex money" category.
I got this idea from The Simple Dollar. You see, no matter how meticulously you track and budget money, there will always be times when you need to pay something you didn't account for. For example, one day, a package from the US arrived here and the postman asked me to pay P50 for it. I certainly didn't know about that! This category allows you a bit of freedom and flexibility and prevents unnecessary stress because it allows you room for unseen expenses which are not necessarily life-and-death. (Keep in mind that this is different from the emergency fund).

6. Identify your short-term saving goals.
Next, you need to create another category for an item or a vacation you're saving up for. You should create another entry for this because this doesn't fall under the long-term savings illustrated in number 2. For example, I usually begin saving up for Christmas in September. You can do this when you're saving up for an iPad or to go to a summer getaway in Siargao.

7. Create a "leisure fund" category.

Allot a little amount money for a leisure fund. How you use it depends on you. For me, this translates to online shopping and shopping-for-Yuri fund. You can dictate the amount you want, but I suggest not going over 10% of your total income. After all, the goal is to save and not to spend!
Forgot to create a short-term savings entry...

8. Study your savings and expenses and compare them to your income.
Finally, add up all the amounts in the categories. The sum should be less than or equal to your income. It should never be more! Remember that to be financially independent, you need to live within or below your means. (The lower the better - but I can't preach what I can't practice! Hee hee)

What should you do if the total amount is more than your income? I'm sorry,dear, but you need to downgrade your lifestyle. That's the reason why you're always in debt. The first thing you need to do is reduce your leisure fund. Still kulang? Remove it completely. A little pagtitiis goes a long way. If it's still more than your income, study your bills. Reduce electricity usage, switch from postpaid to prepaid, etc. If all else fails, get a new job! #kidding #notreally

I hope the steps were easy to note and remember! To conclude this post, here's a recap of what you need to do to make a budget:

  1. Identify your source/s of income. Identify whether they are fixed or not.
  2. List down the fixed non-negotiables or the bills with fixed amounts and are paid regularly.
  3. List down the flexibles, which are also essentially non-negotiables but have fluid amounts. Here is where those who don't have fixed income can use percentages. Remember: income - savings = expenses
  4. Create a category specifically for debts.
  5. Create a flex category.
  6. Create another entry for material things and vacations you're saving up for. This is different from long-term savings!
  7. Allot a small amount for leisure. Never go overboard!
  8. Study your budget and make sure the amount is not more than your income. If it is, it is time for a lifestyle change!

If you were having trouble making a budget plan, I hope this post is able to help you somehow. Next week, let's talk about how I implement my budget using the envelope method. For now, have a happy and blessed weekend!

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