Building a Better Budget

For many people, the consideration to set money aside only comes after they’ve spent the majority of it.

SET A BUDGET

While it’s nice to dream and plan ahead for the future, it’s easy to get lost when you don’t have any structures in place to help you on the road to achieving them. The best, simplest way to go about this is to create set allocations for your money that you can implement as soon as you receive it. This way, nothing is wasted, and you can be sure that you won’t get interrupted on the way to reaching your financial dreams.

One of the most effective methods for budgeting at any level is the 70-20-10 Rule, which divides your salary or allowance into allocations of 70%, 20%, and 10%, each with its own specific purpose. The origin of the Rule is generally credited to Morgan McCall and his colleagues at the Center for Creative Leadership (CCL). Conceived as a means of managing one’s ability to process information, it wasn’t long before the Rule was being applied everywhere from investment to personal finance—anywhere where the commodity in question was of a limited nature.

The benefits of such a breakdown were studied by Josh Leibowitz, a partner at global management consultancy firm McKinsey & Company, who commented on the effectiveness of Coca-Cola’s marketing investment strategy.

For Coke, a successful international corporation, wrote Leibowitz, 70% of their investment was in “Now”, defined as established programs, while 20% was dedicated to new or emerging trends, while the remaining ten percent was intended for “Next”, or untested ideas.

So, how can the success of a multibillion dollar company be applied to one’s monthly salary?

threeimages

Regardless of the size of your salary, there’s no reason you shouldn’t be able to set money aside to begin investing or simply putting funds away for a rainy day if you follow the 70-20-10 Rule.

70%

Setting aside 70% of your money should be enough to cover your basic expenses, such as food and utilities. The majority of people tend to overspend when it comes to these areas, only to find a small fraction left with which to consider saving, by which time it is too late. By dividing your salary as soon as you get it, you will be able to get used to the idea of living within your means.

Let’s use a base monthly salary of PHP 40,000 as an example. From the Rule, 70% would mean setting aside PHP 28,000 for your regular expenses.

A simple way of identifying which expenses are actually essential is to ask yourself if the thing you want to buy is something you really need or just something you want.

By introducing clearly defined parameters to your spending habits, you will find that the act of working from within a set amount will serve as a good exercise to develop self-discipline as time goes by.

20%

From your remaining PHP 12,000 (of the original PHP40,000), you will now set aside PHP 8,000 for your savings account and/or any investments you are considering to undertake. Contrary to popular belief, you don’t need a huge amount to start investing, with some investment houses even offering opportunities for as low as PHP 5,000. Keep in mind, though, that saving is critical to any financial milestones you plan on reaching. 

Something you may want to consider is to place this money in a separate account from the one you access on a daily basis. For convenience, timed automatic transfers of the desired amount can be pre-set to your savings account. This will reinforce, literally and figuratively, that the money is not meant to be used for day-to-day spending.

At this rate, given enough time, you could set aside PHP 96,000 in 12 months. These savings can be directed towards the aforementioned investing, or can serve as additional cash for major purchases such as a car or condo.

10%

PHP 4,000 a month will be set aside to serve as your long-term emergency fund, defined as the money you’ll turn to when you hit the proverbial rainy day, or stop working. This can also be applied towards unexpected expenses, such as car repair. Alternatively, this can be used to pay off any debts you may have incurred, such as credit cards. Remember, if you can’t afford to pay off your credit card bill when it’s due, that’s a clear sign that you’ve already spent too much. In any case, if you were able to save for a year, you’ll feel a lot better knowing that you have PHP 48,000 to face any eventuality.