Working more than 40 hours a week is daunting for many and we often resort to rewarding ourselves with a great meal over the weekend. Couple that with the active social lifestyles of millennials, controlling our expenditures on a daily basis can be difficult. As the cost of living continues to rise, the best way to prepare ourselves is to keep our spending habits in check by creating and sticking to a budget plan.
The Savings Layer
This introductory article talks about the different layers of wealth. Savings can be broken into two parts:
- Getting the most value from day to day purchases through cash backs, discounts etc.
- Putting aside a sum of money in a bank for future use.
The focus of this article is to introduce the golden rule of budgeting and how it can be fine-tuned to match our current financial situation.
50/30/20 Budgeting Rule
*Image from The Balance
This golden rule allocates a portion of our take-home income (after CPF) into 3 different categories: 50% on needs, 30% on wants and the remaining 20% for savings. It’s as simple as that. However, I’m not a huge fan of this allocation as it doesn’t seem to be in sync with the goals of an average fresh graduate. According to the news, the median fresh grad salary take-home salary is $2,720. Following this rule means saving $544/month. If you have seen my goals, I’m targeting to save around $1,182/month and this doesn’t align with it.
Adding 13th-month bonus (assuming another 20% savings each year) and taking 2% annual pay rise, the average fresh grad takes about 7.4 years to save $56,750, equivalent to the average marriage & house renovations cost for each individual (excluding BTO downpayment). What happens after that? Savings go back to 0, leaving nothing in the emergency and retirement accounts.
The same concept applies when we have kids. According to an article by Business Times, 66% of parents are concerned about not having sufficient money to retire. Digging deeper, majority wish they had started saving for retirement earlier. This is why it is important to start early and let the power of compounding do its work, so we could take a breather and relax in the future.
However, if you are a working adult and have already made all your big purchases, then the above rule should work well if the 20% is solely for retirement. But I’ll always challenge my readers to find ways to increase their savings. No matter how financially savvy we are, there are always better ways to manage our expenses.
50/30/20 (Seedly version)
I came across an article by Seedly and they took the budgeting rule to another level.
*Image by Seedly
Over here, 80% expenses on “needs and wants” are reduced to 50%. The additional 30% will be used to invest through the 3rd layer of wealth which focuses on growing our upcoming goals and retirement pots.
This is definitely a better approach for fresh grads like myself as I can build my retirement pot and prepare for my next big ticket purchase at the same time. The 20% savings will be focused on building my emergency funds (3 to 6 times of monthly expenses) before I divert it to accelerate my retirement pot.
Now you have a rough idea on the allocation, bear in mind that just because a budget plan works for the majority doesn’t mean it works for everyone. Let’s break into further details with a step by step approach to budgeting.
Typical Fresh Grad Example
1. Set a target ratio
Just because I introduced the 50/30/20 rule doesn’t mean you die die have to follow. Take some time and think. Some may prefer to save more and have a 40/40/20 ratio, some have more bills and expenses to pay and have a 70/10/20 ratio. Personally, I have my emergency funds ready, I do donations and give allowance to my parents, so my ratio is 60/30/10.
For the sake of this example, I’m sticking with the Golden 50/30/20 rule.
2. Pay yourself first
*Graph showing how much interests our student loans can add up to.
Set aside the minimum sum to pay our loans immediately after we receive our salary. This is a fail-proof way that prevents us from overspending and having to borrow from others just to pay our loans.
I couldn’t stress more on the importance of paying our credit card and student loans as bank interests could ramp up over the long run. Hence, the quicker we pay off these loans, the better. In fact, unless I’m very confident my annual returns on my investments will beat the interest on my bank loans, I wouldn’t even start investing and would rather focus my 30% (wealth allocation) on top of the $400 minimum sum. Taking the median fresh grad take-home salary, that would be $400 + 30% of $2,720 = $1216/month.
Note: If it is a credit card debt with 24% interest, I would allocate a much higher portion to pay the debt.
3. Input your monthly expenses
Estimate your current monthly expenses. This includes bills, insurance premiums, food, transport, entertainment, healthcare etc. As long as money is leaving the bank account, it is considered an expense. If you can’t estimate your monthly expenses, try tracking it for a month using a budgeting app.
Note: Don’t forget to set aside a sum for income tax! Click here for rates.
Taking $1,200 (44%) for this example, there is 11% left for savings.
4. Optimize it!
Optimization is important. It shows our current status and guides us to our goals.
To meet the 50/30/20 target ratio, expenses need to drop by 9% to push savings up to 20%. That means spending $250 less!
What if I’m struggling to cut my expenses?
This is common and many struggle to adapt to sudden changes. Imagine if you decided to cut $150 from grab and another $100 from entertainment. That probably means you cannot afford to sleep an additional 30mins on rainy days that are so sleep-inducing or have 1-2 less drinking sessions with your friends! Similar to when one resorts to quitting smoking, those who quit cold turkey often fail and find themselves back to square one.
The solution? Progressive approach. From the stories I’ve heard, those who succeed don’t aim to cut 9% right away. They reduce their expenses by 1% each month and slowly but surely, they reach their targets. I’m sure there are better ways and would love to hear how you did it below.
The budgeting guide is easy to follow. It helps us spend within our limits and at the same time, it ensures we are saving enough for the future. However, one must not be too rigid with the golden rule as it differs for each individual. Always do proper planning and set realistic targets. Thank you for reading and happy building your layers!
*Featured image from WallStreetSurvivor
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