In our previous columns, we shared to you the basics of budgeting and the common mistakes. Now, may we share to you how to set goal in budgeting.
One of the crucial parts in budgeting is on how to set the goal and effectively executes them. In setting up a goal, it must be realistic. Maybe you goal is as simple as saving up enough money for a vacation or movie-marathon. Budgeting makes it easy to establish both short-and long-term goals and track your progress toward them.
The following are some ideas for how to use your budget to help you meet your goal:
Get beyond the Next-Paycheck Mindset. What do you do when you receive your paycheck? Or else, what are your plans as soon as you get your paycheck? Some used it to pay their debt. Others used to spend on needs and wants. When you are always thinking about the arrival of your next paycheck, that probably means you are burning up your current paycheck and spending the next one (whether by mentally accounting for where it will all go or by putting purchases on credit cards) before you even get it. Considering this situation, it is likely that you are living beyond your means. Since no job is truly guaranteed, and thus neither is your next paycheck, making it a goal to fit your expenses into your current income is an important one. This way, even if you lose your job tomorrow, at worst you will be starting at zero—you would not already be in a hole.
Calculate Your Long-Term Needs. For a long-term goal, such as retiring a certain age, find an online retirement calculator that allows you to enter variables, such as your age, amount currently saved, expected rate of return on your investment and age you want to retire by to find out how much you need to save per month to reach your goal or talk to a Licensed Financial/Investment Advisor. Note that online calculators can produce varied results, so it is best to try several and get a general sense for the amount you need to save. Then, start considering this savings amount as a non-negotiable monthly “expense” and adjust your other spending as needed to make room for the new amount.
Start a Rainy Day fund. We never know what comes our way to spend at. To make sure that unforeseen expenses do not cause your goals to upset track, build up some cash reserves. Three to six months’ worth of expenses is a good cushion. This will help protect you from a sudden loss of income, an unexpected car repair bill or the like.
Save for Fun Things, too. If all your savings are going toward dreary activities like paying off debt and saving for unexpected car repairs and medical bills, your only incentive to save might be the fear of what will happen if you do not. Fear is a great motivator, but it is not very fun. So even if you are in debt up to your eyeballs and are committed to getting our as quickly as possible, it is a good idea to plan some rewards into your savings program. You may think that a 30,000 pesos vacation is setting you back, but consider what would happen if you did not take that vacation. You might go on a spending binge one day to compensate for how deprived you have been feeling under an avalanche of bills, and not only might it cost more than the vacation could have brought.
Pay Off High-Interest Debt. Any debt that costs more than you can earn from your investments after taxes should be paid off as quickly as possible. This is considered “good debt” since your money can earn more for you if you invest it than what you would save by paying off the loan. If your mortgage interest is 6%, you credit rate is 20% and your investment return rate is 10%, what would you pay first? Pay off your credit card first, then invest anything remaining.
Save Automatically. Use automatic withdrawals to stick to your savings goals. By having money automatically deducted from your paycheck and invested in any registered investment companies, or by setting up your own automatic monthly transfer from checking to savings, your money will be out of sight and out of mind. For long-term savings, put the money somewhere illiquid, so you would not be tempted to steal from your future self.
For short-term savings, you will need to keep the money accessible, but do not make it too accessible. For example, if your checking and savings account are at the same bank, it is all too easy to rapidly transfer money from your savings into your checking account. If you have these accounts at two different institutions, the transfer will take time, and that time delay may be enough to cause you to rethink your decision if you are trying to spend your savings on something you should not.
Reduce Spending in a Particular Category. Remember how we said that budgeting is not about deprivation, it is about putting your money to its highest and best purposes? One of your new budgeting goals might be to reduce your spending in a particular category, now that is a higher priority for you.
Set a SMART plan. Have a specific, measurable, attainable, reasonable, and time-bound plan.
We are conducting Retirement Planning and Wealth Accumulation and Preservation seminar for free. If interested, contact us with our mobile number stated below so we can arrange a schedule for your group. It is our pleasure to give you a free seminar and we’ll even provide snacks.
(The writers are both Wealth Analysts of a reputable Financial Company and are both active Licensed Real Estate Practitioners. They also engage in Stock Market Investing. For suggestions and more details, you may contact them with CP # 0919-376-2922 or Tel.No. (074) 244-4026.)
