Most working adults worry about money and their spending constantly.
Winnie from Dr Wealth shares her view:
The topic of budgeting came up again on my radar recently. I was discussing wedding budgets with a few friends who are walking down the aisle soon, and somehow (because us girls like to gossip) the conversation drifted to how much we’d overspent for the month and how “broke” we were feeling.
“I just blew $8k on a wedding package,” huffed J, who had been complaining about how she felt she had been hard-sold by the bridal boutique. “Now my parents are asking for more dinner tables. And I haven’t even finished planning for my honeymoon!”
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The rest of us nodded gravely in support. One by one, we started opening up about our individual money woes: eating out too often, buying a new mobile phone, attending one too many wedding banquets, overspending on overseas vacations etc.
As the meal went on, it became progressively clear to me that something wasn’t quite right. The alarm bells sounded when one of our mutual friends confessed sheepishly that she had less than $5,000 left in her savings account, despite having worked for almost 5 years and earning over $4k a month.
I didn’t say anything, but that night, I went home feeling sombre. All of us are intelligent, educated young professionals, I thought grimly, but why are we such suckers when it comes to spending? Why is it that we cannot seem to budget wisely?
The budgeting dilemma: mind vs. body
After much thought, I think I’ve finally identified the problem: mindset.
Many times, we start budgeting out of a sense of guilt. We consciously (or subconsciously) know that we’ve been overspending and want to “do something about it”.
That’s commendable in itself, but I think the problem arises when we don’t hold ourselves accountable to our budget. We budget not because we’re genuinely concerned about our future; we budget because we think it’s a fix-all solution that can somehow help us stop overspending. We want our budget to cater to our spending habits, not the other way round.
And so, we continue spending the way we’re used to spending, thinking that it’s “enough” for us to “just save whatever is left”. Even if we notice our bank accounts dwindling, we don’t worry, because we know we’ll always have next month’s paycheck to fall back on.
When you’re caught in this cycle, it feels like a case of wanting to have your cake and eat it too. But objectively, if you look at it, it’s really a case of living from paycheck to paycheck. And that, as any financial expert will tell you, is a recipe for disaster.
What happens if you run into an emergency and suddenly need money? What happens if you lose your job? What happens if one day you feel like retiring but realise, to your shock and horror, that you cannot afford to stop working? Who’s going to support you then?
A closer look at how Singaporeans budget
Based on my research, there are two popular budgeting methods that many people subscribe to:
- Envelope budgeting – Dividing your disposable income in cold hard cash into different “envelopes”, each representing a different category of household expenses.
- The 50/30/20 rule (which we’ve talked about extensively here) – A minimalist way of balancing your money according to your wants and needs. Coined by Harvard bankruptcy expert Elizabeth Warren, who was named one of the 100 most influential people in the world by TIME Magazine, together with her daughter Amelia Warren Tyagi.
Personally, I prefer using a combination of both methods. I follow the 50/30/20 guideline as a framework, but use envelope budgeting to control my daily spending. (Tip: If you still find yourself overspending, follow the steps listed in this simple guide to help you stick to a budget.)
Many of my peers, however, prefer the 50/30/20 budgeting rule instead, because of its simplicity. In a nutshell, here’s how it works:
- Calculate your actual take-home income (after CPF and income tax contribution)
- The first 50% of your remaining budget is for what you need. These are essential expenses for you to get by day to day, such as food, clothing, transportation, housing loan/rental and so on.
- The next 30% bucket is for what you want. These are your lifestyle expenses, such as eating out, shopping, mobile phone plans, entertainment, hobbies, etc.
- The last 20% is for what you should have, and goes towards your savings and long-term financial goals.
Budgeting works wonders, if you know how
The “problem” with either of these budgeting methods is that it requires a lot of self-control and discipline. And that’s exactly what many of us who need to budget tend to lack most.
Unfortunately, discipline isn’t something that can be taught or easily learnt. I can’t give you a magic formula that will miraculously turn you from super spendthrift to super saver. But what I can do is to share some stories with you to show you why budgeting matters, and hope that these real-life examples will be enough to motivate you to want to budget for yourself.
Let’s start with my neighbour, Uncle Chan, who is in his early-fifties. He’s a savvy, well-to-do businessman. I used to (or still do, actually) envy him for getting to travel extensively for work.
A couple of weeks ago, for the purposes of this article, I approached him and asked him to share how he made his fortune. What he told me was very interesting and thought-provoking.
30 years ago, when he had just graduated and was starting his career, he was just your average man-in-the-street. He thought about money like how most of us do: he thought his job was going to finance his living expenses until he retired at age 65. So he worked hard at his job – he would go to work, earn income, save a little, and spend the rest.
Like many young couples, he went on to get married, bought a house, a car, took expensive family vacations, had children…the list goes on. In that sense, he was just a “normal” Singaporean.
But all that changed when he started climbing further up the corporate ladder and gaining a better understanding of his value as a worker. He started reading up on personal finance, which led him to dabble in stocks and save more (sometimes up to 50% of his income) for his retirement nest egg. And the more he learnt, the more he realised he had been thinking about money the wrong way his entire life.
By then, he had accumulated a significant amount of savings (thanks to the power of compounding) and also made money from his investments. He saw how his money was working for him, and that, to him, was like an epiphany – he started to see how those savings, if properly managed, could actually fund his lifestyle without him having to work for a living.
His “epiphany” tied in nicely with his changing life goals. As he grew older, he was coming to see that the most important thing in life was not about owning a big house or flashy car, but to spend more time with his family and have freedom. It wasn’t that he hated his job or wanted to stop working. But he wanted the freedom to work when he wanted to work, choose where he wanted to work, and do what he wanted to do.
“When you’re just starting out,” he told me, “such freedom seems like an impossibility. But as you grow older, it can become reality, provided you’ve been careful in saving and investing all along.”
He added, “Nowadays I don’t see money as a way to buy material things; I see it instead as a means of achieving freedom for myself and my family.”
Today, Uncle Chan runs a very successful importing/exporting business. While he still works as hard as ever, he gets to set his own schedule and can afford to retire anytime he wishes.
Have you ever noticed that people whom you know are rich tend to be more careful with their money? Put more bluntly, they may even come across as being cheap at times.
One of my ex-bosses, a retired entrepreneur, is that way. My colleagues and I used to remark on how down-to-earth he is – how simply he dresses and how frugal he is with spending money, despite being rich enough to retire by age 39.
If you think about it, that attitude is exactly why he managed to retire early. Beyond working hard to build his company and make it successful, he understood the value of money and how to make it work for him. Even when he was at the peak of his career, he didn’t spend a dime frivolously. He saved and invested most of his earnings to contribute towards his retirement nest egg, and happily, he’s reaping the rewards now as he pursues his interests in life and spends more quality time with his wife and four young children.
The purpose of these two stories is really just to highlight the importance of having the right mindset towards your money. If you want to be as successful as these two Singaporeans, you’ll have to learn to look at budgeting not as a means of controlling your spending, but as a useful tool that enables you to better manage your money so that you can reach your life goals eventually.
Remember, managing your money is a long-term process that will benefit you in the long run. I think that’s something many people fail to realise. They don’t see a need to save more money or cut back on their expenses, because they don’t see an immediate improvement in their circumstances. But that’s the thing about budgeting — you may not reap the benefits now, but you will definitely see it 10, 20, 30 years down the road.
So, for your future good, please start budgeting wisely. Here are some tips to help you along: firstly, visualise your eventual goal in your mind. For example, if your dream is to retire by age 45 and travel to see the world, keep that dream in mind and use it to motivate you every time you tether on the verge of overspending or feel the urge to blow your emergency savings on a vacation.
Another thing you should do is to switch up your priorities. Instead of first budgeting 50% for your essential expenses and 30% for your lifestyle expenses, allocate the money for your 20% savings first, because that’s the money that will contribute most towards your life goals. (Of course, if you can afford to save more than 20%, do so!) What’s left is then the actual sum of money you can afford to spend.
For example, assuming you earn $3,770 per month (which includes employer’s CPF contribution, according to the Ministry of Manpower’s 2014 statistics), your effective take-home income is around $2,578. According to the 50/30/20 budgeting rule, you should be saving at least 20% of that to meet your retirement goals, or $516 a month. That leaves a fairly reasonable $2,062 for your expenses, or around $66 a day.
If you’re afraid you’ll slip up and forget to save, there’s an easy workaround: just set up a banking arrangement that automatically transfers 20% of your take-home salary every month from your main chequing account to a separate savings account. 20% may seem a lot to you if you’re a spender and may not seem like much if you’re a saver, but at the very least, it’s a good start. Just imagine that $500 you save today growing to $6,000 a year later and over $200k 30 years down the road – how’s that for motivation?
To those of you who have been overspending, or who have given up budgeting because you previously found it too tedious/not helpful: I strongly urge you to go back and give either budgeting method another shot. The first step is always the hardest. But once you can convince your brain that you need to budget, the actual budgeting becomes much easier. Trust me, I was once there.