Budgeting 101


For my first ever post on this blog, I am sharing my thoughts on budgeting because I realize that not many people I know ‘budget’ their income and I think that it is important to have one in order to manage your finances efficiently and sleep better at night.  Budgeting is like setting goals on where your money should go and if you have a monthly paycheck and you find yourself at the end of every month wondering where your money went or why your expenses always exceed your income and you couldn’t wait for the next paycheck to come in, I suggest you start setting your priorities and work on a monthly budget right now.

To start off, make a list of your usual expenses as well as your financial goals (buy a house, save for an emergency fund or your children’s education, get out of debt, etc.).  Then choose a money management system that will work for you.  I personally use T. Harv Eker’s JARS system in which you allocate your income into the following categories:  Necessities (50%) + Long-term Savings for Spending (10%) + Financial Freedom Account (10%) +Education (10%) +Give (10%) + Play (10%) = 100%.  You can adjust the allocation percentage according to your current financial status or goals.  The JARS system works for me because it is very simple and it covers my financial priorities.  I opened up different bank accounts for each category and at the end of every month, I sum up our household income (after tax), divide/deposit it accordingly to each account, and use the figures as my budget template for the following month.

The following is an example of how you can categorize your spending needs and savings priorities using the JARS system:

Necessities (50%): Groceries, mortgage, bills, insurance, loans, transportation expenses, clothing, and everything else that you NEED.

Play (10%): Travel or vacation trips, dining-out, and indulgences. I define ‘indulgences’ as something that I can live without but “I-don’t-care-I-must-have-it” because I DESERVE it.  You can spend this money on a whim or save it for, say, a future travel plan, in which case, I suggest opening up a savings account so that the fund earns interest while you wait for that travel plan to happen.

Education (10%): Children’s tuition and other school fees, opportunities for growth and development, RESP contributions or savings for your children’s future education, books and learning materials, and other learning-related expenses.

Give (10%): Donations, gifts, and financial help extended to families and friends.

Financial Freedom Account (10%):  This is the fund that you save for your investment ideas/plans.  Maybe, a down payment for a rental property or for funding other passive income streams that you have in mind.  The idea is to invest in something that will make your money grow and give you returns.

Long-Term Savings for Spending (10%):  This is for those bigger stuff that you want, say a new car or new furniture for your house, home improvements and renovations, savings for emergency fund, etc.

Now do not get too obsessed with the allocations.  Like I said, work on a budget that will best accommodate your current needs.  Say, increasing your budget for necessities to maybe 70% and reducing your budget for play or education or even your savings to 5% as you pay for an existing loan and adjusting your allocations as you reduce or pay off all your loans.  What’s important is that you are now looking squarely at your current situation and you are doing something towards achieving your financial goals.

Happy budgeting!

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