This is the fourth of the series financial planning posts to help readers get started in managing their personal finance. Sharing the links for the earlier posts for those who have missed it
Day 1: Setting Up Your Financial Goals
Day 2: Knowing Your Net Worth
Day 3: Understanding Your Income Flow
This step is critical and very important in achieving financial goals.
What is budgeting? Budgeting is planning where your money will go.
This reminds me of the statement “Failing to plan is planning to fail.” You don’t want that. I don’t want that. We don’t want that. We want to achieve our dreams so we are going to do this exercise even this might bore us to death.
(Nope. I haven’t heard or read any news about someone dying out of boredom)
Budgeting is difficult especially to those who does not have the discipline to do the activity. For this reason, I will be sharing two strategies how to do your budgeting. One is suited for those who has less time to do the nitty-gritty of budgeting. The other is best for those who has keen eyes on details.
What is the strategy? The rule is every time you receive an income, you are to divide it among the following:
This action is very doable. The good thing about this strategy is that you can follow the same formula whether you get an increase in your income or decrease in your income.
We all know that when people receives additional income or receives a salary increase, more often than not, the lifestyle changes as well. We reward ourselves with finer things in life. It is not wrong actually. It is your money so it is your decision where to spend it. By following the percentage formula, somehow you also increase your savings and investment in other areas of your life.
Below are the description of the categories. Remember, you can change the percentages as you see fit.
Strategy 2: Line Budgeting
If you have done the Day 1 task, you should know now how much you need to reach the financial goals that you have listed.
For example, if you will need P10M in ten years time and using the present value calculator, we will know how much we need to save regularly so that we will have the amount on the time we need it.
Line Budgeting is setting aside specific portion of your income to its designated goal.
Example, a person who is earning P50,000 per month might set aside P25,000 for his living expenses, P5,000 for his dream car, P10,000 for his dream house and another P5,000 for his dream vacation.
Clear?
Line budgeting is difficult but makes perfect sense because of it being very specific.
Most likely, you might find yourself not having enough current income to save for all of your financial goals. If that happens then you should prioritize which among your financial goals will take priority.
Or you also have the option of finding additional source of income so that you will have enough for all of your dreams.
The Good and The Bad
The first strategy is doable and easier to follow. The only downside is that you might not have enough money to fulfill all of your dreams. Even if you are sticking with the percentages, if you do not have that big income in the first place, you might find yourself not having enough money by the time you reach your financial goals timeline.
The second strategy, while difficult to do, is more realistic and very specific. It ties up with the financial goals. Through monitoring, we will know whether we are on track in achieving our goals or not.
Overall, the best strategy is the one that will help you achieve your dream. Do not put too much thought on which one to use. It is important that you take action and do the budgeting.
Action may not always bring happiness, but there is no happiness without action – Benjamin Disraeli
Day 1: Setting Up Your Financial Goals
Day 2: Knowing Your Net Worth
Day 3: Understanding Your Income Flow
This step is critical and very important in achieving financial goals.
Budgeting!
 |
| via Tax Credit |
What is budgeting? Budgeting is planning where your money will go.
This reminds me of the statement “Failing to plan is planning to fail.” You don’t want that. I don’t want that. We don’t want that. We want to achieve our dreams so we are going to do this exercise even this might bore us to death.
(Nope. I haven’t heard or read any news about someone dying out of boredom)
Budgeting is difficult especially to those who does not have the discipline to do the activity. For this reason, I will be sharing two strategies how to do your budgeting. One is suited for those who has less time to do the nitty-gritty of budgeting. The other is best for those who has keen eyes on details.
Strategy 1: Use of Percentages
I picked this up from Secrets of the Millionaire’s Mind. This strategy is very doable and I was able to stick to it. Honestly, I am still using it due to ease but I will soon transition to the other method I picked from Registered Financial Planners of the Philippines.What is the strategy? The rule is every time you receive an income, you are to divide it among the following:
- 10% Financial Freedom
- 10% Long Term Spending
- 10% Education Account
- 10% Play Account
- 10% Charity
- 50% Necessity
This action is very doable. The good thing about this strategy is that you can follow the same formula whether you get an increase in your income or decrease in your income.
We all know that when people receives additional income or receives a salary increase, more often than not, the lifestyle changes as well. We reward ourselves with finer things in life. It is not wrong actually. It is your money so it is your decision where to spend it. By following the percentage formula, somehow you also increase your savings and investment in other areas of your life.
Below are the description of the categories. Remember, you can change the percentages as you see fit.
- Financial Freedom – this is money never to be touched. You put the money in investments that will give you returns.
- Long-Term Spending – this is for future foreseeable expenses. College education fund for kids, or that dream vacation. These kind of expenses fall under this category
- Education Account – the idea is that we should not stop learning. The money under this category should be used for new lessons or reinforcing those skills and knowledge that we already know
- Play Account – you will love this category because this deals with splurging. Saving is a difficult thing to do for most of us and the idea for this account is to use this on things that will reward ourselves for sticking with the planned budget. You can use this to buy new clothes, new gadgets etc.
- Charity - for giving back to society.
- Necessities – no need to explain. Use the money for expense you need to live
Strategy 2: Line Budgeting
If you have done the Day 1 task, you should know now how much you need to reach the financial goals that you have listed.
For example, if you will need P10M in ten years time and using the present value calculator, we will know how much we need to save regularly so that we will have the amount on the time we need it.
Line Budgeting is setting aside specific portion of your income to its designated goal.
Example, a person who is earning P50,000 per month might set aside P25,000 for his living expenses, P5,000 for his dream car, P10,000 for his dream house and another P5,000 for his dream vacation.
Clear?
Line budgeting is difficult but makes perfect sense because of it being very specific.
Most likely, you might find yourself not having enough current income to save for all of your financial goals. If that happens then you should prioritize which among your financial goals will take priority.
Or you also have the option of finding additional source of income so that you will have enough for all of your dreams.
The Good and The Bad
The first strategy is doable and easier to follow. The only downside is that you might not have enough money to fulfill all of your dreams. Even if you are sticking with the percentages, if you do not have that big income in the first place, you might find yourself not having enough money by the time you reach your financial goals timeline.
The second strategy, while difficult to do, is more realistic and very specific. It ties up with the financial goals. Through monitoring, we will know whether we are on track in achieving our goals or not.
Overall, the best strategy is the one that will help you achieve your dream. Do not put too much thought on which one to use. It is important that you take action and do the budgeting.
Action may not always bring happiness, but there is no happiness without action – Benjamin Disraeli
