A budget is a written down plan that can help you keep track of your income, expenditure and debts, among other liabilities. By budgeting, you can sensibly manage your financial future and safeguard your independence through taking care of your basic expenses and staying committed to your savings and investment plans, which will help you achieve your goals.
If you already have a budget, ensure that you go over it regularly to ensure that it is still the best for your current financial situation. If on the other hand you are just starting to budget, read the following tips which will guide you to come up with the best budget.
- Incomes
Under incomes, only include the income stream that you are assured of receiving i.e. your basic salary or wages and any other steady income e.g. from investments or businesses in Singapore. Any incomes that are not assured such as commissions and bonuses should be excluded. The rationale is to allocate your expenses based on incomes that you can count on, either to spend or for debt repayment.
- Expenditure
Ensure all expenses are included: tax, loan and credit card repayments, retail installment plans, post-paid expenses, utilities, food, transport and other necessities. If you have miscellaneous expenses like money sent to parents and relatives, include these, as well as money set aside for entertainment – shopping and outings, among others. Also include monies directed towards investments, savings funds and insurance.
- Surpluses and deficits
Monitor the budget to ensure that you remain on course, adjusting as required with changes in income and/or expenses e.g. getting an addition into the family, getting a bonus or pay rise, or getting a pay cut.
Where there is a surplus, think about ways you can put the money to good use e.g. paying off debts that don’t have or have little penalties, or adding to the amount saved up. Where there’s a deficit, see where you can trim your expenses, but try as much as possible not to trim your savings completely.
Where does the money go?
There are expenses that cannot be reduced, like taxes, debt repayments and other financial obligations. Once you take up a loan, or insurance, these become mandatory payments. Therefore, take a long hard look at your current and future financial prospects before making any big financial commitments.
Avoid being in excessive debt. It is recommended that no more than 35% of your monthly pay should be used on all debts. If you want to take up life insurance, choose a basic policy that would keep premiums affordable.
Also, find out where you can trim your basic expenses e.g. going for cheaper brands of household items, getting together with a few friends and/or family to buy items en masse to take advantage of economies of scale, limiting the number of times you eat out and carrying lunch from home instead of going to restaurants, among others.
Have a very clear picture of what are considered needs and which are wants. You may need to buy a shirt, but getting it from an expensive store when you can ill-afford it is not wise. Sometimes more expensive is not necessarily better. Get used to living below your means for a better future.
Planning your investments and savings according to your goals
- Prioritizing – the first step is to have health insurance and a notable emergency fund. Then you may invest in life insurance if this is part of the plan. Savings and investments towards retirement come next, after which you may slot other financial goals in.
- Calculating timelines – for every goal stated in (1) above, determine how much it will cost to meet each one according to the time you have (known as the investment time horizon). For long-term goals, ensure that you have accounted for inflation in the value of money and prices of goods in order to make adequate savings.
- Choosing insurance – for your insurance packages, determine how much it takes to get the health insurance you want for you and your family. Some insurance products offer protection as well as investments/savings plans. Ensure you know what kind of product you are signing up for. Where you have limited resources, get basic protection; you can increase to better bundled packages at a later time. Take insurance earlier to benefit from the compounding effects and your current low-risk situation which earn you lower premiums.
- Allocating resources – determine how much income you have now, and what you need to reach your future goals. Identify how you can cover shortfalls e.g. starting a side business from your hobby in your spare time. Where it’s still not enough, cover the most important goals first, like insurance, retirement savings, emergency fund and saving for your first home’s deposit.
- Reducing risk – diversify your investment portfolio to reduce your risks. Ask your financial advisor to go over your current portfolio and offer tips on how you can diversify e.g. selling shares to buy bonds where you are heavily invested in equity funds. Only buy products that you understand fully and are fully comfortable with. Regularly monitor your investments and make adjustments as necessary to maximize your returns.
