How To Make A Budget That Works
Starting and maintaining a personal budget can be life changing when done right. The only way to plan the things you’re going to spend money on is to plan them well.
Using this method, you visualize all of your money and where it’s all going, with the ability to move money between categories or “envelopes” if priorities change.
Not many people these days will carry real envelopes full of cash, but the classic envelope mantra can still work even if you use your debit card, credit card, wire transfers, or even mobile payment services. .
Personally, I have been using a version of this “envelope” budgeting method since 2015 and I swear by it. According to this method, you start by giving a job for every dollar (or ringgit in our version). Once you can do that, you can plan your real expenses, adjust to unexpected changes, and spend less than what you earn.
Let’s break it down here.
Give every ringgit a job
You may have already created large “envelopes” in your head, like your money at a restaurant, the payment of a car, etc. But what about the rest of your expenses?
The problem with not having a budget for everything is that you won’t be able to track all of your current and future spending from memory alone. You might be looking at your account balance and thinking to yourself, ‘Hmm, I still have RM500 left in the bank so I have enough to buy this RM400 bag,’ forgetting in the moment you still have an unpaid RM100 phone bill, you still need that haircut before you go back to the office, and you still have to eat until the next paycheck.
The first step in the envelope method is to enter all the money you have, including savings, into the system, no matter where that money is. (Whether it’s in three different banks, in the wallet, under the pillow, whatever.) That way you will have one source of truth, to inform your money decision-making process later.
After that, set categories for everything (and we mean everything), then take all the money you have and break them down into those categories. Don’t worry if your total amount of money pooled earlier includes savings that you won’t be touching anytime soon – just set a category for that as well.
The idea here is to give every ringgit a job and never leave money unallocated, as that is just a recipe for impulse buying. Your categories may include:
|Frequently||Rent / mortgage, bills, car installment payment, gasoline / public transport, catering, groceries, household items, money for family members, medication, personal care, clothing, books / entertainment / games, streaming services|
|Sometimes||Car maintenance / repair, car insurance and road tax, appliances, home repairs, annual software subscriptions|
|Finally||Emergency fund, general savings, vacation, new phone / computer, down payment, retirement|
|Generously||Donations, donations, dāna / tithe / zakat|
|Temporary||Credit card debt, student loan|
From there, whenever you’re about to make a purchase, don’t look at your account balance or cash on hand – look at the category balance instead. Running out of the “Dining Out” category? So maybe having that mocha smoothie after lunch isn’t a good idea.
Plan your real expenses
There are generally three types of expenses when it comes to frequency: one that occurs at least once a month, such as food or bills; the one that is scheduled but happens every few months / years, like your auto insurance or software subscriptions; and one that is unforeseen / unexpected, like accidents or a new phone.
The secret sauce of the envelope method lies in the categories that you have defined for the second and third types of expenses.
Think about those times when you went out of your way to collect that RM600 for your car insurance and road tax due at the end of the month? With the category in place, you will just have to set aside RM50 per month. And don’t forget the holiday season, when you tend to spend more on travel, accommodation, and gifts.
While you’re still new to it, you might have a debt (or a lot) to pay off. Remember to categorize them and allocate money to them as well.
Adapt to unexpected changes
Even for the third type of expense, unexpected expenses, you’ll want to plan ahead for them as well. Think of it as a savings, except instead of a large lump sum you have multiple savings, each with their own purpose (retirement, new phone, auto repair, etc.).
Hit wood, but you know your car will break down someday, even if it’s years away. Even if your current phone is still new, put the RM100 aside in the “ new phone ” category, and in two years you will already have enough for a mid-range device.
You won’t feel anything. Think of it this way – you are going to pay off all your expenses, one way (savings) or another (credit card). Why not “pay” them earlier in the budgeting system, well in advance and without interest?
With your categories in place, anytime you overspend one category, you can simply cover it with extra money from another category.
But keep in mind that with great flexibility, great consequences. Covering your ‘dine out’ category with money from your ‘new phone’ category will only delay the cash purchase of that new device you love. It’s best not to over-spend your “dining out” category in the first place. And a good budgeting system lets you view it all in one place.
Spend less than you earn
You’ve heard this advice all your life, but it’s no different than saying “eat healthy” or “exercise more”. How do you get there? Where do you start?
Well, once you understand how to use this budgeting method, you will notice that now you naturally tend to spend less than what you earn. Besides this extremely rewarding experience, this new habit will prepare you for other financial milestones to come.
Heck, you can even create one yourself on a spreadsheet and sync it to your phone through cloud storage.
For this to work, your app must always be with you (on the smartphone), have the ability to record expenses (and also configure your budget, of course), sync it to the cloud, or export / transfer. its data (if you change phones) and preferably be available on, or synchronized with, a desktop / laptop computer (for a larger screen).
If you think your financial situation in 2020 wasn’t leaving much to be desired, don’t worry because you are not alone in our current economic recession. Based on this experience, perhaps the most important financial gift you can give yourself is to start a personal budgeting system in 2021 if you haven’t.
This article is written by our colleague Reuben Thum, Senior Marketing Analyst in the Marketing and Communications (MaC) department of Juris Technologies.
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