Katy Perry might as well have been asking this question to a person who does not live by a budget, “Do you ever feel like a paper bag drifting through the wind, wanting to start again?”
One sure way of getting unstuck from a financial rut is to make a budget and stick to it.
A household budget does not only give you what, where, when and how to save but also the why. These things that a budget provides are all interconnected.
For instance, a lot of people say that a good amount to start with in terms of budgeting for savings is ten percent of gross income. But that’s like saying that a rubber mallet is a good tool. But if the job requires breaking through cement, a metal hammer would be the better option. In the same manner, even if you are successful at it, how will you know if saving ten percent of your gross income is sufficient?
The budget, when done properly, will give you the reason for saving, in other words, the “why”. For example, you will know that saving Php1,000 a month for twelve months starting in January will be sufficient if you wanted to spend Php12,000 for Christmas. And while the example given is only for one year, budgets can give the “why” for a period extending over several years.
As you can see from the example just given, the “what” automatically came out from the “why” for budgeting. One question that arises is, “How will the amount needed for saving be raised?” The budget will help show that if leftover income is not enough, then expenses will need to be cut. Go through your cash flow over a few months to get a good picture.
In answering the “how” of budgeting, you will at the same time answer the “where”. But the “where” of budgeting has two sides to it: the sources of savings and the outlet to put the savings in to generate more savings. The previous example gave the sources of savings. The outlet will depend on the duration of the “why”. Generally speaking, for short-term “whys”, time deposit instruments, treasury bills, short-term commercial papers and other money market instruments would be the best outlets, whether direct or via pooled funds. For long-term “whys”, bonds (e.g. private sector or government), stocks (e.g. preferred or common) in whatever geography or currency, and in combination or individually would be ideal.
The “when” of budgeting will be determined by the time money will be needed and the frequency at which money can be saved and invested.
So far, we have talked about formulating the budget. The larger task is in sticking to it, which will be the subject of the next blog. Budgeting may be tough and even boring at first. But eventually, you will get the hang of it.
Believe what Katy Perry says, “…you’re a firework, come on let your colors burst.”
(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)
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