Living within your means
How do you lose $5000 a year? By spending $13.70 a day on useless things.
Share this post with your teenager. I would have loved to know about this when I was younger.
I wanted to write this post for my teenagers, but it is also for me, as a reminder.
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I think, especially in today’s context, it is important to know how to live within our means.
Throughout my adult life, I sometimes find myself in situations where I could have had a much easier time if I was more disciplined with my money. This is true when things are going well and I become careless. I start to think and live like there will always be (more than) enough. Life usually has a way of teaching us quickly.
Although I am mostly prudent, I have been guilty of overspending. I know I cannot do that over a prolonged period. I know how important it is to stick to a budget. Yet why do I occasionally fail?
I think it all comes down to being honest with myself. Like many people, I become careless.
What is a budget? A budget is simply a framework to allocate income, control expenses, and to build a secure financial future. Whether as a young professional navigating your first job, a parent supporting a growing family, or Gen XYZs planning for retirement, it is a tool to help one live within one’s means for a stress-free life.
In this post, I would like to share and explore some ideas for budgeting, and practical tips for keeping our finances in check.
Know Where Your Money is Going
There are basically 2 items on your budget: income and expenses. Ins and Outs. Income is money coming in, such as the salary from your job, dividends from investments, social services payments, or money from other sources. Expenses are what’s going out. Things you spend on. Expenses include fixed (regular and consistent expenses like rent, school fees, etc…) and variable (like groceries, nice dinners at the restaurant, entertainment, etc…) costs.
The first principle in budgeting is to know where your money is going. Often, we think we know. But if we’re honest with ourselves, most of us don’t. I have some ideas, but it wasn’t until I record every single dollar I spent over a month that I really know where my money is going.
For example, I didn’t realise how much I spent on entertainment every month. Netflix, YouTube, Spotify, Amazon Prime, and Disney+. That’s more than $100 every month. I also have a bunch of software. Dropbox, Microsoft 365, iCloud and Gmail. I hardly use over 5% for each of these. That’s another $100 or more. Then I have WordPress hosting for my blog (which I didn’t use), domain names hosting (which I also do not need), Titan email servers (I already have Gmail). And mobile plans, NBN plans, and the list goes on.
Then there are occasional coffees in the morning, Subway lunches, late night Macca’s and takeaways. Download a movie. Buy an eBook. $10 here, $20 there. And everything adds up.
Although it is nice to be in a position where you can completely disregard expenses, I do not think it is necessarily a good thing. There is a Chinese saying that if you are not careful with your money, you will eventually exhaust a mountain of gold and silver. I am glad that when my elder son moved out, he quickly learned that resources are limited, and he needs to choose how to spend what’s left after paying rent and bills.
Unless I have a good grasp of what’s going out, I will lose control. And I will always pay my ever-growing credit card bills without knowing why they get bigger and bigger.
How can we regain control?
There are practical steps we can take today to improve our financial situation. I believe that even if you’re on a pension or have limited income, learning to manage finances can lead to better outcomes and reduce budget stress significantly.
Record everything
There’s a saying: How do you lose $5000 a year? By spending $13.70 a day on useless things.
Monitor your expenditures. Record everything. You will be surprised how those “loose change” expenses add up. Knowing what you spend on will give you insights into your habits and identify areas for potential cuts or savings.
There are many tools and apps that help you with tracking your spending and budgeting. Most banks provide some sort of app that helps categorise your transactions. You can also use the old spreadsheets or even pen and notebook, depending on your preference and level of tech-savvy. The important thing is to use it diligently.
Create a Budget
Collect all your sources of income, including salaries, bonuses, freelance earnings, money from babysitting or walking your neighbour’s dogs each morning, etc. Then gather all financial statements, including bank statements, credit card statements, bills, receipts, and any other relevant documents. You should have 2 piles: incoming and outgoing.
If you have recorded everything, now’s the time to organise expenses into a list, including fixed expenses like rent/mortgage, insurance, loan payments, and variable expenses like groceries, entertainment, and transportation. Categorise them according to housing, utilities, food, transportation, entertainment, savings, debt payments, discretionary spending, etc.
Decide how much is your total monthly income after taxes. This is the starting point of the budget. This is where it begins. Account for all sources of income, including irregular ones like bonuses or freelance work. When I did this, it also helped me to think about how I might increase my income from other streams. Writing this blog is one of them.
Analyse your ins and outs. Review your expenses and identify areas where you could overspend, or places where you could cut back on. Maybe you don’t need 2 coffees a day? Maybe you can cut back on pub-crawling or dining out to once a month? Are you spending more on online shopping than you thought? Look for patterns in your spending, and adjust accordingly.
I think it is always a good idea to do this when you are financially in a good position. The idea is to stay in this place always. Enforcing discipline early will help you avoid future hardship.
Set goals
One of the main purposes of budgeting is to arrive at a better financial situation. Cutting back on unnecessary expenses means you will have additional funds to invest in the future. Not just to survive the present.
Define short term (1 year or less), medium-term (1-5 years), and long-term (5 years or more) financial goals. Examples include saving for a vacation at the end of the year, paying off a car loan in 3 years, saving up for a house deposit, or building a retirement fund. These goals will also motivate you to live within your means. And also improve your means.
Start with your total income, then subtract all your expenses. Allocate funds to each expense category based on your priorities and goals. The one rule is to make sure that total expenses do not exceed total income. If they do, either reduce discretionary spending or increase your income. Or both.
Review and adjust
Review your budget regularly, maybe once a month, to see if you’re on track. Like staying on a diet or doing meditation, we lapse from time to time. Setting a day each month to review your budget builds awareness and habits in the long term. As you review, adjust your budget based on changes in income or expenses. You can be flexible and make changes as long as your budget remains realistic and effective.
Use Credit Cards carefully
These days, it is virtually impossible to live without credit cards. Some people opt to use only debit cards so that they do not get into debt. That’s fine, but credit cards have advantages. For a start, you get to use the bank’s money interest-free for 40-55 days depending on the provider. That’s a wonderful deal.
And as you charge your credit card, you earn points that are redeemable for cash or other vouchers. But most of all, credit cards protect you from online fraud by limiting your liability if your details are stolen. If you lose money on your debit card, it is gone. On a credit card, the liability is $100, regardless.
The important thing is to treat your credit card LIKE a debit and pay off everything at the end of each billing cycle. Don’t roll over and just pay the minimum. The interest will kill you, eventually.
Automate savings and bill payments
Set up automatic transfers to your savings account and automatic bill payments to ensure you’re consistently saving and paying bills on time. Missing a payment deadline can be expensive, especially if it is a credit card payment.
Monitor your progress
As you progress towards your financial goals, you should be able to see your savings grow steadily. Celebrate milestones and achievements to help stay motivated to your plan. Creating a budget is just the first step. The easy step. Sticking to it is the real challenge and requires discipline and consistency.
Tips to make it easier
Pay yourself first. For me, this is one of the most useful tip when managing my budget. Based on my goals, I transfer money my savings account the moment I receive income. I pay myself first. Before all the bills, and all the utilities. Before even paying the tax man. Next, I pay fixed expenses like mortgages and utilities, etc. I will only spend whatever is left.
When I do this, I am less likely to overspend.
I started using *Raiz a few years ago when I came across the app. It is a micro-investing platform where I roundup my credit card expenses into an investment account. If a coffee costs $6.50, Raiz will round up to $7 and put 50c into my investment account. Over time, it adds up. And helped me review my coffee habits. I also put $50 a week into a savings portfolio, and forget about it.
Recently, I could withdraw a few thousand dollars for a family trip back to Singapore without having to stress over the expense. It was for that purpose, and it worked for me.
*If you use this link to sign up, we each get $5 deposited into our account.
It’s Free money.
Set big goals. This motivates me. And helps me stay on track. Having a clear and exciting goal, such as a grand vacation or buying a first car, can help you give up on frivolous things to achieve bigger goals.
Create a buffer for unexpected expenses: Allocate a portion of your budget to an emergency fund to cover unforeseen costs like medical bills or car repairs without derailing your financial plan.
Benefits of Budgeting
By living within your means and understanding your financial landscape, you can ease the anxiety and stress associated with money management. It provides a sense of control and empowerment, allowing you to make informed decisions that align with your priorities and goals.
In the long run, budgeting should lead to financial independence, so that you can live life on your terms. Ultimately, we all want to enjoy financial flexibility, greater peace of mind, and the ability to pursue our dreams without constantly worrying about money.
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