Budgeting is never as easy as it sounds right? I mean, creating a budget is so deceptively simple – you just need to set aside X number of dollars for your expenses, X number of dollars for savings and be disciplined enough to control your emotional spending.
But a major reason why many people can’t stick to their budgets is simple – they don’t know exactly how much money should be budgeted for their expenses (groceries, transportation, etc.) and how much should be saved.
But there’s a way you can allocate the right amount of money so that you are able to take care of your expenses, purchase your “wants” and save/repay your debts.
Here’s how this simple budgeting approach works:
Limit Your Expenses to 50% of Your “Real” Income
Your expenses will always claim the bulk of your income – that much is certain for the vast majority of Singaporeans today. However, the key is for your expenses to take up no more than 50% of your income.
Your monthly expenses include:
- Your monthly rent/home loan repayment
- Your utilities (electricity, water, phone, cable, internet, etc.)
- Your transportation expenses
- Your groceries
- Your insurance policies
- Your children’s education expenses
Granted, some of you might be in the situation that your expenses bypass 50% of your monthly income. Is that OK?
You’ve really got to work to get your monthly expenses under the 50% mark by making adjustments and cuts. If you need help on cutting your expenses, you can check out our articles on cutting back on your monthly expenses, saving money on groceries, saving money on electricity and saving money on your phone bill.
Limit Your Discretionary Spending to 30% of Your “Real” Income
Now this is a number that’ll surprise most of you – yes, you can use 30% of your take home pay towards purchasing “wants”. C’mon now, it’s hard enough to survive in Singapore’s tough work environment without having the capacity to de-stress every month.
After all, isn’t retail therapy the only thing keeping most of us out of IMH?
Discretionary purchases (wants) include:
- Dining Out
- Movie Nights
- Luxury Items
Having 30% of your take home pay to use towards “wants” is certainly enough to satisfy most people. This part of the budgeting strategy is both generous and dangerous – as it will take a great deal of discipline not to get too carried away.
If you want to maximise that 30%, take money-saving approaches such booking cheaper flight tickets when going on holiday, downloading some great money-saving apps to save on dining and retail purchases and having a good dining credit card that offers good perks and benefits.
Limit Your Debt Repayments and Savings to 20% of Your “Real” Income
“ONLY 20%”!!! Yes, only 20% should be used towards your debt repayments and savings in this budgeting strategy.
The rationale behind keeping the discretionary spending at 30% is that you’re more likely to stick within the bounds of this larger percentage instead of a ridiculously low percentage (10%-20%) that you’ll probably go over.
Remember, most of your monthly loans will be covered under the 50% of your salary going towards your expenses. So this 20% should be used towards any consumer debt such as credit card debt and personal loans.
You should try your best to knock out debt as quickly as possible.
The faster you pay down your debt (especially credit card debt), the more you’ll be able to apply towards your retirement savings and emergency fund.
If you’re someone who wants to ramp up your debt repayments and savings for retirement, please feel free to adjust your 30% for discretionary spending so that it’s 30% debt repayments/savings and 20% for discretionary spending.