Recently updated on: November 18, 2023
Key Takeaways:
- Budgeting is telling where your money will go, even before you receive it.
- Pay yourself first - save before spending.
- Income - Savings = Spending
- Budgeting Rules to Try
- 50-30-20 Rule
- 50-20-20-10 Rule
- 40-30-20-10 Rule
- 70-20-10 Rule
- Don’t mindlessly follow these budgeting rules. Make sure that your budget reflects your current financial status.
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 you can only budget if you have the money to do so. They fail to realize that it is much more important to learn how to budget when you have less.
As Luke 16:10 (NIV) says, "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."
Table of Contents
What is Budgeting?
Budgeting is simply creating a plan to identify where your money should go, which is why it's also called a spending plan.
You put a name to every peso coming your way so they won’t get lost or taken by your other spending priorities.
By budgeting, you are telling where your money will go even before earning them instead of just going with the flow with your expenses.
Remember that failing to plan is planning to fail.
There are many ways to budget and a vast amount of resources on the Internet, but I’ll just share the basics.
Budgeting is Simple.
I said budgeting is simple — not easy.
Budgeting is simple because you just have a few rules to follow. You just open a spreadsheet and allocate a portion of your income to different spending categories and follow them day after day, month after month, and year after year.
Sounds simple, right? But is it easy?
Of course not! Budgeting is not easy because your worst enemy is usually yourself. As long as you can't control your spending habits and change your mindset about money, budgeting will always be tricky.
Now, let’s talk more about an essential concept — paying yourself first.
Pay Yourself First.
Paying yourself first means saving money before spending. You’ll have to put away a portion of your income to your savings and retirement fund, making your future more financially secure.
Unfortunately, the typical way people budget is using this formula:
Income - Expenses = Savings
They earn, spend, and save the rest - if there’s any. So, this formula is unreliable because expenses will always pile up until you’re left with zero.
If being left with zero is bad, there’s something worse, like how many people use this formula:
Income - Expenses = Debt
They earn, spend more than they have, and fall into the debt trap. This shows that your income is not enough to cover your expenses.
If you’ll remember the hierarchy of a strong financial foundation, I mentioned the importance of having a healthy cash flow to avoid getting into debt.
If there’s a bad and worse budgeting formula, here is the best.
Income - Savings = Expenses
You earn money, set aside money for your savings, then spend what’s left. Simply, you only spend after you have saved, and this is what we’ll focus on.
Track Your Expenses
Before tackling how to budget, it is essential 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 on.
You may use a notebook, but an expense-tracking app is 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!
Common Budgeting Rules To Choose From
Before we discuss the different budgeting approaches, let’s first define some words so we will be on the same page.
- Needs - these are for necessities and essential items for survival. This includes food, rent, utilities, and similar items.
- Wants - this includes your guilt-free and discretionary spending, like shopping, subscriptions, games, and travels. Your holiday expenses will also go here.
- Savings - this involves the money you set aside for your emergency, investing, and retirement. If you’re in debt, your savings should be used for repayment.
- Giving - we’ll use this as a collective term for tithes and charity.
- Tithes - this is usually a tenth of income given to God through the church.
- Charity - this involves organizations that accept donations to provide for those in need.
For simplicity of illustration, we’ll use P20,000 ($400), a common salary in the Philippines.
1. 50-30-20 Rule
The 50-30-20 budgeting rule is popular because it works due to its simplicity. To do this, you’ll divide your income into three main categories.
- 50% for needs
- 30% for wants
- 20% for savings
From an income of P20,000, P10,000 (50%) is for your needs, P6,000 (30%) is for your wants, and P4,000 (20%) is for your savings.
Simple, right? However, there are other variations for this, as we’ll look at later.
2. 50-20-20-10 Rule
The 50-20-20-10 Rule is a variation of the 50-30-20 Rule, which takes 10% from the wants allocation to a dedicated giving (tithes and/or charities) fund.
- 50% for needs
- 20% for wants
- 20% for savings
- 10% for giving
With a P20,000 salary, the P10,000 (50%) will go to your needs, P4,000 (20%) to your wants, another P4,000 (20%) to your savings, and the last P2,000 (10%) to your giving funds.
3. 40-30-20-10 Rule
The 40-30-20-10 Rule is a variation of the previous Rule, with the 10% allotted for necessities transferred to the discretionary expenses.
- 40% for needs
- 30% for wants
- 20% for savings
- 10% for giving
For your P20,000 income, P8,000 will go to your necessities, P6,000 to your wants, P4,000 to your savings account, and P2,000 for your giving fund.
4. 70-20-10 Rule
I recently read about this budgeting rule from HyperJar.com, saying that based on their survey, the 50-30-20 Rule no longer worked and proposed a different paradigm — the 70-20-10 Rule.
- 70% for needs
- 20% for wants
- 10% for savings
From a salary of P20,000, P14,000 (70%) will go to the necessities, P4,000 (20%) to your wants and guilt-free spending, and P2,000 (10%) to your savings account.
This budgeting rule will mostly apply in places with high living costs since it requires a steep requirement for necessities and limited savings.
5. The Envelope Method
Once you have 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.
What If I Can't Save 20%?
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.
What If 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 what you want, but you deny your future self and future family 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 because they know their priorities.
Where Should I Put My Savings?
Of course, putting all your money in an envelope and hiding it under your bed is not secure. That is why you may consider placing it in a bank.
Banks are safe and secure. 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 are digital banks which are usually PDIC-insured up to P500,000. They offer a high-interest rate of more than 3% per annum.
Final Thought:
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?" again.
It takes time. Like any other skill, you need to build the habit of saving. You will need to learn to say "no" to some things to allow you to say "yes" to other things.
Learn to differentiate your needs from your wants, and doing so will make budgeting easier.
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