Five Cents Ten Cents

Posted: 13 Dec 2008 04:05 AM CST

I was reading SgMusicwhiz’s blog post “Creating a Personal Budget” and was inspired to write a related post discussing how you can live within your means if you track your expenses and plan ahead. You can read his post for the basic framework on how you can plan your personal budget.

Record your past and learn to anticipate the future

One of the things I got from reading “Your Money or Your Life” by Joe Dominguez and Vicki Robin is to start tracking my daily expenses, earned income as well as passive income from investments. This tracking of cash flows allowed me to see actually how much I was really saving versus what I “thought” I was saving.

It also prompted me to be more aware of expenses that hit at various times of the year and to be in a better position to anticipate my cash flows.

What I realised from tracking my expenses is that we tend to under-budget for once a year payments. Some of these include:

• Income tax – you need to file by 15 April of each year and pay sometime in May/June/July of the same year
• Property tax – you need to pay by 31 Jan and IRAS has this annoying habit of increasing your annual value (goes up but hardly ever comes down)
• Club/Membership subscriptions in professional bodies

These expenses can be hefty depending on your income level. Be sure to set aside money to make such payments besides your day-to-day living expenses.

Besides those above, it’s good to plan to spend LESS than your monthly income because under the current poor economic sentiment, job security is a myth. Even if your housing loan is fully paid using CPF funds, can you be sure that our beloved Gahmen will not cut employer’s CPF contributions? Are you sure the bank will not raise interest rates? Are you confident that you and your spouse’s jobs are secure and will not suffer pay cuts that may result in corresponding cuts to CPF contributions (both employer and employee’s portions?) Do you trust your employer not to reduce bonuses and variable payments to employees?

Creating a buffer and being flexible

If you plan your living expenses to be below what is available after you deduct your housing loan payments (using cash, if any), car loans, utilities, transport, groceries, eating out, mobile, cable-tv, entertainment etc. Then you will be able to save and more importantly create a buffer for yourself so that you don’t feel financially stressed.

Remember to prioritize your spending. Your home and utilities are necessities. Your cable-tv and entertainment are not. So adjust accordingly. Your home can be foreclosed by the bank or HDB if you don’t pay up, but you can tighten your belt for things like eating out and watching movies.

There’s enough stress in the workplace, with relationships and what-not, why add on more stress from living close to or worse, beyond your means?

Be well and prosper.