For most people, the word “budget” can never be associated with the words “easy” and “fun”. It always has that restrictive and challenging sound to it and perhaps because budgeting is a major struggle for many of us. But contrary to what you feel and think, budgeting is not about repressing your control over money and cutting down on your spending and the fun that goes with it. It’s all about guiding you on how to efficiently spend your money and in the process help you save some so you can have more to spend in the future. For this reason, I refer to it as a “Spending Plan” instead of budgeting.
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Effectively managing your personal cash flow, the money that goes in and out of your pocket is the first step towards achieving a healthy financial life and a “Spending Plan” is a great tool in helping you accomplish it. Here are the things that you need to do in order to develop your own Spending Plan.
Table of Contents
1. Put your Spending Plan on paper.
Writing provides clarity, direction, and focus. If you do not write down your spending plan, you will surely forget it. Start by writing down your monthly income net of taxes and other government contributions.
2. Track your monthly expenses.
Begin by writing down your fixed expenses like food, transportation, mortgages and utility expenditures. In short, list down your necessity expenses. Shopping is not a necessity! Do not try to justify it and include it under your necessity bucket. You only list down the things that you cannot live without.
3. Establish your spending allocations.
This is the crucial part, it is the stage where you divide and allocate your income to things that matter to you. Here’s a sample Spending Plan that I learned early on in my career that was taught to me by my mentor. It involves six categories in which you allocate certain portions of your monthly net income in accordance with your financial priorities.
The first allocation obviously goes to Necessity Expenses, a portion of income that will be allocated for basic needs like food, shelter, transportation, etc. Try to keep this portion within 50% to 60% of your monthly net income so you can have more free portions to divide among your other financial needs and wants. After allocating for your Necessity Expenses, you move on with your allocations to the following:
Investment Fund – this is a portion of your income that will be allocated in buying investments that can lead to passive income in the future. This is the portion that you will use to save for future business ventures, investments such as stocks, bonds, mutual funds and all other paper asset investments. You can also opt to use part of this fund to build your emergency savings account.
Premium Expense Fund – this is a portion of your income that will be allocated in saving to purchase premium or high cost items like car, travel, gadgets, etc. You can also opt to use this fund in paying off your credit card obligations.
Personal Improvement Fund – this is a portion of your income that will be allocated to fund education, seminars, books, trainings, etc. to further your competencies. There is truth to the adage of “Knowledge is Power”. The single greatest investment you can make is investing in your learning. Continuous education can provide you with exponential positive results in the future so spending some of your income towards learning should be part of your spending plan.
Gift Fund – this is a portion of your income that will be allocated to fund your gift to your parents, relatives, friends, tithes, etc. A colleague calls this portion “B.I.R.”(Bureau of Inay/Itay Revenue). Spending for our family and loved ones is not a bad habit but like everything else, it should be done in moderation and in accordance with our resources. This category of our spending plan will also help us in determining just how much we can only afford to lend in case someone needs our help financially.
Feel Good Fund – this is your indulgence fund. Spend it anyway and anywhere you want. Be it in shopping, a trip to your favorite coffee shop, a relaxing massage or a sumptuous meal in a fancy restaurant.
Here is a sample allocation for your Spending Plan:
Do your own allocations, again spending plan should not be restrictive in nature, make sure you do your allocations within your own parameters and specifications. Allocate more percentage on things that matter to you the most.
4. Following through with your Spending Plan.
Now that you have done your allocations according to your priorities, it’s time to implement and make it work. Do not put all your paycheck inside your wallet, instead only bring your allocations for Necessities and Feel Good for your monthly spending and stash away the rest either in envelopes or jars. Label your envelopes or jars accordingly so you can track your savings for your investment, premium expense, personal improvement and gift accounts. It will be nice if you can put and write down specific goals on your envelopes say, “Food Cart Business” for your investment fund envelope, “Travel to Boracay” for your premium expense envelope or “Mom’s 60th Birthday” for your gift fund envelope. Naming your goals for each allocated fund will add to your motivation and discipline in sticking to your spending plan.
Implementing a spending plan is like going to the gym or getting into a new exercise regime. First several attempts are challenging but once you get started, your mind and body will adapt and get used to it. Eventually, with consistency it will no longer be a conscious effort but an automatic activity for you and becomes a normal part of your life. Spending plans give you more control over your money, help you prioritize things and ultimately lead you towards financial success.
About the Author
Jesi Bondoc is a Registered Financial Planner, Public Speaker and Personal Finance Coach. He is currently the Director of My Wealth MD and Partners, Inc. specializing in investment advisory and oversight. He also conducts wealth planning seminars and workshops for various corporations in the Philippines. For your money questions, you can reach him at email@example.com and for more info about RFP, please visit www.rfp.ph or email firstname.lastname@example.org
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