One crucial “adulting” skill everyone should learn is budgeting. Unfortunately, it’s not taught in school and rarely discussed at home.
Many people don’t consider budgeting vital because they think that you can only budget if you have money to do so. They fail to realize that it is much more important to learn how to budget when you have less.
As said in Luke 16:10 (NIV), “whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much.”
Budgeting is simple.
I said simple, not easy. Budgeting is simple because you just need to follow a set of rules. You allocate a portion of your income to different categories and follow it – every single day.
But budgeting is not easy because your worst enemy is yourself. As long as you can’t control your spending habits, budgeting will be tricky.
Pay Yourself First.
Paying yourself first means to save first before spending. The typical way many people budget is using this formula:
Income – Expenses = Savings
But this formula is very unreliable because expenses will always pile up until nothing is left. What’s worse is people are using this formula:
Income – Expenses = Debt
They spend more than they receive, and as a result, they fall into a debt trap. A better method to follow is this:
Income – Savings = Expenses
You only spend after you have saved.
Track Your Spending
Before tackling how to budget, it is important to know where you are spending first. That is why you should track your spending. You need to list your expenses and see if there are items you can live without or are spending more.
You may use a notebook, but an expense tracking app is far more accessible. There are plenty of choices to choose from in PlayStore or AppStore – for free.
I’ve been tracking my expenses since 2016. It wasn’t easy at first, but it eventually became part of my routine. I know where I spent my salary in the last four years!
Okay, so much for an introduction. What is budgeting?
Budgeting is simply creating a plan to identify where your money should go. Remember that failing to plan is planning to fail.
There are many ways on how to budget and a vast amount of resources on the Internet to choose from. What I’m sharing are just the basics.
50-30-20 Budgeting Rule
It is a common budgeting strategy that works well due to its simplicity. You divide your income into three main categories.
50% for Necessities – This includes rent, bills (electricity, water, or Internet), food, and other essential expenses.
30% for Wants – This includes the expenses you want to spend on yourself without feeling guilty of splurging. Your Shopee and Lazada purchases, movies and subscriptions, and travel may come into this category.
20% is for savings and investments or debt payment (if you have one).
For example, your monthly income is P20,000. P10,000 (50%) is for your necessities. P6,000 (30%) is for your wants. P4,000 (20%) is for your savings.
50-20-20-10 Budgeting Rule
A common modification of the 50-30-20 Rule is 50-20-20-10.
50% is for necessities, 20% is for your wants, 20% is for your savings, investments, or debt payment, and 10% is for tithes (or charity of your choice).
For example, with your P20,000 income, P10,000 (50%) is for your necessities. P4,000 (20%) will go to your guilt-free spending. Another P4,000 (20%) is for your savings, investments, or debt payment. And P2,000 (10%) is for your tithes (or charity).
Remember, these budgeting rules are only guides. You can change or modify it as you see fit, such as the percentages, or the number of spending categories.
But I can’t save 20%. There are way too many expenses.
If you can’t, you don’t have to. If you’re earning P20,000, you can start with 5% (P1,000) or even 2.5% (P500). The important thing is to build the habit of saving. And also, don’t go into debt if you can.
But I don’t want to deprive myself.
Whether we like it or not, we will always deprive ourselves of some things. It is just a matter of perspective. You may not deprive your present self of the things you want, but you deny your future self and future family of a more comfortable life.
The secret to budgeting is balance. You can always spend on things you want while also saving for your future. Identify your priorities. Know where to spend and where not to.
There are stories about Ilocanos being “kuripot” or stingy. But after working with some, I realized that the correct adjective to describe them is “masinop” or frugal. They know where to spend on because they know their priorities.
The Envelope Method
Once you finally created your budget, you will need to store them. One simple trick is by using envelopes. I use an accordion folder for durability and easy handling.
If you’re using paper envelopes, you will need at least three or four. After receiving your salary, you divide it based on the percentage of each category.
It is crucial to stick to your budget, no matter what. So it is essential to build your emergency fund early on to avoid using your budget from other categories.
Where should I put my savings?
Of course, putting all your money in an envelope and hiding it under your bed is not secured. That is why you may consider placing it in a bank.
Banks are safe and secured. It can also earn you some interest. Unfortunately, banks usually only offer 0.25% interest per annum, which is very low and won’t even beat inflation.
What I discovered is digital banks which are usually PDIC-insured up to P500,000. They offer a high-interest rate of more than 3% per annum.
Budgeting is an important skill to learn as early as possible in your adult life. You need to identify where your money is going and never ask, “where did my money go?” ever again.
It takes time. Just like any other skill, you need to build the habit of saving. You will need to learn to say “no” on some things to allow you to say “yes” on other things.
Learn to differentiate your needs from your wants and by doing so, it will make budgeting easier.