A budget is basically a plan on how to spend the income you have. One way to do this to first track all your expenses for a few months and then set up a budget to trim your ‘lattes and avocado toasts’.
Personally, I’ve never liked the idea to focus on such details. Let me show you easy ways to do budgeting.
Setting up budgets
Focus on the big picture.
We can use goal cards we made in the last video and put up on the fridge to make ‘The Money Dream’ Board. We had grouped them into needs, wants and desires. We had also colour coded them to match The Money House. So let’s take them and put them somewhere to remind us as we spend our money.
In the accompanying video, I’ve used standard paper trays – you can also use large envelopes, folders, plastic sleeves. I thought about jars but they are little impractical for today’s paper and digital bills.
We label these need now, need later, wants and desires. The red cards (basic living, place to live, insurance and emergency fund) go into need now. The blue cards (kids education) goes into ‘save – need later’. The green cards (current lifestyle and home) goes into wants. The yellow into save-desires.
As you get your bills and receipts, put them into the right trays. Things like your retirement and kids education don’t have bills today but that’s why the cards act as reminders. After a few months, you can track how much money has gone where.
You can set up an ‘ideal budget’ to track your spending against, which you can adjust according to your circumstances and goals. An often used rule of thumb is –
- Basic living – 50% (including no more than 30% in rent)
- Wants – 20%
- Saving – 30% (includes need later items like retirement and kids education, as well as additional wealth for desires).
From time to time check the split of your spending. Remember you’ve collected receipts in the trays so we can look through those. You can adjust from your saving but this shouldn’t fall below 20%.
Managing cash flows
In addition to the motivation, you should automate your cash flows and build better habits.
So if you get paid monthly, you can straightaway split the money into these three buckets. Put a systematic investment plan into place for your 30% savings to be invested through mutual funds. If you don’t know which funds yet, park them into a cash or liquid mutual fund for now. If you have access to no fees bank accounts, you can use them to separate the other 50 and 20.
If you don’t, then you could try what I do. I pay my basic living expenses by –
- 1) automatic direct debit for amounts that stay the same like rent/society maintenance, internet or where I am unlikely to dispute up to a certain amount like electricity
- 2) mobile transfer though banking app for amounts that change slightly each month like mobile phone bill
- 3) debit card for groceries and transport.
Remember you need to leave some money aside for insurance and emergency cash in your account – if you don’t trust yourself, you can put these into another liquid mutual fund.
Everything else I put on my credit card. But then put automatic debit from my primary account to pay the full amount off every month. You can also ask your bank to set a lower limit to match what you’ve put aside for wants.
You should be able to export your credit card statement into excel once a year so you can see a breakdown on what you’ve spent on. You can also check any bad habits like spending too much on alcohol when going out, or ordering take-away food all the time.
Keep looking at the goal cards to remind yourself what the real rewards are.
Look forward to hearing what’s worked for you.
Frequently asked questions (FAQs)
While my advice is 30 percent throughout your life, this will vary depending on when you want to retire, how much you expect your retirement lifestyle to cost relative to your earning years etc. Check out the formula in the video on this question in the #AskHansi series on YouTube
My advice is to limit spending on essentials to 50 percent, including no more than 30 percent on rent or EMIs for your residence. Check out the video on this question in the The Money Hans series on YouTube