How To Make A Good Budget
This article was first published on Plannerd.io.
Having a budget is the bare minimum that one can do for their personal financial planning. A budget is a simple plan on how you are spending your money in the future.
A budget can be very simple, or it also can be a complex subject. According to AKPK, poor financial planning is the top reason why Malaysians applied for their debt management programme. Having an effective budget will help you in the long run and the following aspects is what I think constitutes as a good budget.
1. Choose a strategy that works for you
In the earlier article, I introduced 4 budgeting strategies.
However, there are more than that. A good budgeting strategy is the one that works best for you and it must be relevant to your current lifestyle. Explore your options, a simple google search will provide tons of result.
Currently, I am using the expense-based budgeting method for myself and my clients. However, I wouldn’t recommend beginners to start with this, mainly because you may find this too complicated and may lose interest very quickly.
If you want to find something that is easy to follow, you can start by “Paying yourself first”. Set aside a certain sum of money into a separate bank account every time you get your paycheck.
2. Be prudent
For some of you that do not know, I have a background in accountancy. One of the accounting concepts is Prudence, i.e. do not overestimate the amount of revenues or underestimate the amount of expenses.
It is always better to prepare for the worst than not being prepared at all. One-off expenses like medical expenses, maintenance for vehicle or home repair should be accounted for in your budget.
Besides the immediate expenses, being prudent also means being prepared for outliving your retirement savings. The average lifespan in Malaysia is around the age of 75, but there is no harm for paying yourself till the age of 90, you know, just in case.
3. Having someone to check your budget
A budget is a plan for the future. We make a lot of assumptions and there may be blind spots that we may overlook. Having an extra pair of eyes to check your budget is a great way to get rid of these blind spots.
Choosing who to check your budget may be sensitive and there may be no right answer. However, the first person that come to mind should be your spouse/partner. Money is always a taboo subject, however, it is very important in a relationship. Being (financially) naked to one another not just enhances the trust between partners, but also being very honest with yourself.
If you need a third party to check your budget, you may engage a friend you can trust, or a licensed financial planner.
4. Start tracking your expenses
I started budgeting without tracking my expenses. It worked okay.
However, since I started tracking my expenses last year, my budget has become a lot more accurate. I can almost predict my expenses for the coming months with less margin of error. This allows me to reduce my emergency funds from 6 months to 3 months and use the excess money for other investments.
Having that data at hand, you can also plan for your insurance coverage without over-insuring. Many of my clients have a coverage based on assumptions. But if you can budget how much you would spend in the future, that is the amount that you need to be covered.
5. Review and evaluate regularly
What is the point of budgeting if you do not review and evaluate your budget? Just like a corporate budget, a personal budget should also be reviewed and evaluated regularly.
The objective of reviewing your budget is to determine whether the budget is in line with your life goals. If you’re heading towards your destination within the required time frame, great! If not, probably you should adjust your budget to reach the destination, e.g. increase your investment portion and reduce the expenses allocated to the “Wants bucket”.
Another thing that I would pay attention while reviewing my budget is to determine the variance (difference) between my budget and what I spent. This can only be done with you track your expenses.
A good budgeting habit…
… is a great way to start your journey in financial planning. It is much easier than tracking your everyday expenses (but I hope you will eventually start tracking).
I would recommend that you to do this at least once a year to align your budget with your life goals. Take a weekend off, go someplace nice with your significant other and start budgeting for your future.