When it comes to money, we all have trouble saving enough to live a modest life.
Having a budget is not always in everyone’s to-do list, but I’d argue that it is a necessity toward being financially disciplined.
I’m sure you find a lot of people sharing memes on Facebook about how they go broke by the time payday arrives.
In a 2015 World Bank survey, “Enhancing Financial Capability and Inclusion in the Philippines: A Demand-Side Survey“, they found out that:
- 23 million adult Filipinos have insufficient funds to cover necessities “regularly” (26%)
- 57% who budget their money have enough left after paying expenses, in comparison to the 42% that don’t budget
Here, we will cover the basics of budgeting, what you need to create a budget, and some helpful tools to make budget tracking easier.
While this topic may not cover investment, it aims to at least help people prepare their personal budget that aligns with their goals in the future.
|Table of Contents|
|1. What is a budget?|
|2. Determining your budget goals|
|3. Steps to creating a budget|
|4. Tools you can use to track your budget|
|5. A budget can improve your way of life|
What is a budget?
A budget is a financial plan that companies, families, or a person uses to get a feel of their revenues and expenses over a specific time period, usually long-term (a year).
They are periodically reviewed, in accordance to any changes, such as an increase in salary, or increase in rent.
Creating a budget helps you manage your finances, having control of what you should save and spend in the short and long term.
Budgets are useful to enhance your awareness of personal income alongside your necessary expenses (utilities and rent).
At the same time, it can help you minimize spending in other areas that are not essential, e.g. smoking, alcohol, and other vices.
Determining your budget goals
“If you fail to plan, you plan to fail” – Those words could not be any truer.
When planning your budget, it should be aligned with your goals as well.
Whether it be to save more money or cutting expenses, having a goal is an important aspect of budgeting.
When I learned business management, I have found that the way you plan business goals is applicable for any kind of goal you have in mind.
A goal you have should always be S.M.A.R.T., meaning it should be:
- Specific – Always state specific goals.
Example: “I will cut fast food expenses by 30% this month”
- Measurable – Be aware of your progress.
Example: If your target spending is 10,000 pesos this month, you would only be successful if you spend less in relation to your goal.
- Assignable – Your goal doesn’t have to be limited to you only, it can be a family member or your boyfriend / girlfriend.
Example: You and your partner agree to spend less on clothing by 20% this year.
- Realistic – We’re human, it’s understandable that a goal is too big to reach immediately. Do it in incremental steps to accomplish long-term success.
Example: Instead of wanting to save 48,000 pesos in 6 months, make 4,000 pesos a month your goal in one year.
- Time-bound – Creating a deadline gives you accountability.
Example: See the Realistic example above.
Steps to creating a budget
1. Lay out your monthly income
A month is typically four weeks, so try to budget your salary for that span of time.
For those who just recently graduated (congrats!) and hired already, you can use this handy tax calculator, which gives you the approximate amount of your take-home pay (after taxes and contributions).
2. Monitor your mandatory spending
Mandatory spending are those expenses that you can’t avoid and are necessary for your survival. They include the following:
- Utility bills (electricity and water bills)
- Transportation costs (MRT, Jeepney, fuel, etc.)
- Rent, insurance, and mortgage payment
Common sense would dictate that entertainment or other activities such as shopping (more than what you need), or dining out are not part of your mandatory spending.
It is also worth considering changing aspects of your lifestyle:
- If your car’s monthly expense make up for more than 15% of what you earn, consider using public transportation instead.
- Groceries can be bought in bulk to save more in grocery bills (S&R or Landers).
3. Assess your goals, debt, and retirement
What are your short and long-term goals with your budget? What’s the purpose of saving money and minimizing expenses? These questions can only be answered by you.
I remember my friend shared how she bought herself a new iPhone, but NOT with her money. She borrowed money because she didn’t have enough.
It turns out she would do this for other purchases such as shoes and make-up. Eventually, she racked up enough debt that she is trying to pay off to this day.
You have to be honest if you live in a similar situation to my friend. Ask yourself, how much debt are you in and how long will it take you (at worst) to pay it off?
Being aware of your circumstance is the first step to getting out of debt.
Eventually, you’ll have to think about your retirement, and how much you want to save.
Always think about the long-term benefits and you will save yourself a headache in the future.
4. List down your discretionary spending
Let’s face it, life would be boring if you just saved money for retirement. There is no doubt that we have hobbies that we can’t let go.
For example, I splurge on video games once in a while, and know that it is not really part of mandatory spending. Rather, it is your discretionary spending.
From hobbies to shopping, these are things left over from the expenses mentioned above.
You don’t have to cut down on this part as much as you want if it gives you joy (Remember Marie Kondo).
However, it is wise to at least remember to live within your means.
Tools you can use to track your budget
If you plan to use the “pen and paper” approach to tracking expenses in your budget, you can do so.
However, if you want to utilize the power of modern technology and psychology, you have options to choose from.
Programs & Apps
YNAB is the most popular program and app specifically created for budgeting. Although I have not used it myself, I have heard nothing but praise using YNAB.
YNAB is priced at $6.99 a month ($84 annually), but you can try it out for free for 34 days.
Mint is a free program / app, and only earns money through advertisement.
It links your bank account to track your income and expenses and provides an overview at other parts of your finances.
You can also see your bills that are due for the month and receive alerts for unusual activities that are coming from your account.
A personal recommendation of mine, I have been using this app for almost 2 years now.
I was using this when I first learned how to budget, and it is has been routine to examine my expenses at the end of the day.
You can view your daily, monthly, and yearly expenses, as well as identify where you spend the most (in the form of a pie graph).
The Envelope System
This is neither a program nor an app. It is merely a tool to make you aware of how much budget you have for specific expenses.
An envelope system helps you reduce spending in aspects where your expenses are likely to go overboard. These are usually clothing, food, and your hobbies.
Once you know your spending categories, withdraw your budget in cash.
Next, get a small envelope, and write down the spending category (e.g. food). Put the amount of money inside you deem is enough to last you a month.
All spending for that category will be taken from that envelope. At the end of the month, anything left will be carried over the next month.
The envelope system is a convenient way to provide you a visual aid and make you think carefully of your spending habits.
For example, if your envelope for clothes is already empty, you will have to think if it’s worth spending above your budget.
Successfully using this system can give you satisfaction of being able to spend below your means and being responsible with your money.
A budget can improve your way of life
Learning how to budget is one way of becoming more financially literate.
You will eventually be able to recognize patterns in your purchasing behavior and change your spending habits.
I hope that this inspired you to take control of your personal finance.
What other tips do you have when trying to budget? Share with us in the comment section below.
If you like this post, kindly share it to anyone you know that needs help in making a budget.