“Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” – Joe Biden, 47th Vice President of the United States
Hi dear readers! I’m glad to have you back. This is the second half of our two-part article on successful budgeting. If you haven’t read the first part, please make sure to do so because I discussed significant points there such as why we need to understand income, expenses, personal habits and the importance of goal setting to the success of your budget. What we will try to achieve by the end of this is for you to be familiar with the steps to crafting your own budget. So, without further ado, please read on!
7. Plan obligation
Financial obligations refer to any outstanding debts or regular payments that you must make. These could come in the form of credit card fees, loans, mortgages, taxes, and other scheduled service payments. Obligations are an important aspect of personal finance. Why? Because failing to meet them entails punishment, the severity of which depends on the contract signed by you and the other party. For example, if you fail to pay your car loans, the bank will repossess the car. If you fail to pay your credit card fees and loan dues on time, the interests will pile up and before you know it, you’d be knee-deep in debt. An even worse scenario would be one where you’d be evicted from your own home by banks or Pag-IBIG should you keep missing your mortgage payments.
It is therefore incredibly important that you understand and plan around your financial obligations. Every budget should first include all financial obligations for which you are responsible over a given time period. That way, you are taking charge of your obligations and not the other way around.
8. Plan necessities
As you’ve noticed by now, planning is really a vital task in your quest for financial success. This includes planning for necessities (i.e. the basics), the items or services you absolutely must buy with your income to live, such as food, clothing, shelter, and medical care.
9. Set aside money for emergencies
This is for your emergency fund. Any financial consultant worth their salt would tell you that this is an absolute must – even the first thing that you need to achieve before ticking off other financial milestones in your checklist. You never know when these emergencies will come knocking at your door so when you create a budget, set aside a portion for your emergency fund. That way, you can sleep without getting worried and your budget is not disrupted in the event of an unexpected financial blow.
10. Plan family allowance
A married couple can fall into endless arguments when they fail to manage spending or to agree on financial decisions. Budgeting is understandably made even more difficult when you factor in your children to the equation. Hence, it’s very crucial to manage the family finances properly if you are to live a happy and peaceful life.
If you have a family, you have to take a slightly different approach to budgeting. Slightly, because it’s pretty much just like personal budgeting, but for three, five, seven people, depends on how many you are in the family. A family budget should ideally reflect how the family income is spent on necessities, comforts, and luxuries and for it to be successful, planning still plays a central role. Luckily, you don’t have to do it on your own. You can discuss it with your partner or if there are more than two people who are earning in the household, you can discuss it as a team.
11. Plan personal allowance
We’ve established already that it is not the goal of budgeting to deprive you of your wants. That is why when you create a budget, set aside a little something for yourself. You can just spend the money you have set aside for fun and enjoy your purchase with no qualms. You’ll never have to wonder whether you can afford the things that you have set your eyes on and the best thing is, you can buy them guilt-free!
12. Balance and rebalance
In budgeting, it is very crucial to know how to balance and rebalance your income. This means being able to assess the effectiveness of your budget. There is a need to balance your income with expenses. If your income is steady and your expenses are getting higher, you’ll find that it will be harder to budget. That’s when you should rebalance your budget – either cut back on your expenses or increase your income. In cutting back, you can realign the proportions you set on certain expenses, depending on your identified priorities. Budgeting needs to be flexible and dynamic. You should know when and where to adjust for it to work for you again.
To create a successful budget, you need to work out the relationship between your income and your expenses. If you find that your income is less than your lifestyle costs, you will need to find a way to lower your spending (i.e. adjust your lifestyle) or to increase your income. If your income is greater than your expenses, you will have money left over to spend on your own discretion. However, it’s considered best practice to add it to your savings (your emergency fund) or park it in an investment vehicle.
I hope I’ve made it clear that, contrary to popular belief, there are plenty of reasons why you should prioritize making and living within a budget. Making one means you can spend more purposefully. You can take the time to think about where you actually want your money to go and ensure that you don’t waste the money you work so hard for. It is now high time that you make one if you don’t have a budget yet. And if you already have one, I hope that you reap and enjoy all its benefits to make you more excited to stick to it. If you’re having difficulty making a successful budget, don’t fret. You can talk to a Registered Financial Consultant® as they are professionals who can help you craft one that works for you!
Disclaimer: Just a reminder, dear reader, that the content in this column is my opinion only and should not be construed as investment advice because I am not your financial adviser, neither did I take into consideration your personal objectives, financial situation, needs or circumstances as your fiduciary. It is mainly for your entertainment and education only.
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