Budget Your Finances: Prepare for Your First investment (1 of 4)
B = Budget Your Finances
If you’re a new investor, then this page is what you need to get started. I created simple 4 steps to help you prepare for your first investment, and the first step is creating a budget.
The purpose of creating of a budget is to assess how you are doing financially first. You should only consider investing when you are financially well. Think about investing like exercising, you should not be exercising if you are not feeling well. I will encourage you to start by creating a monthly budget as it is easier and less time consuming than an annual budget. While it may seem daunting at first, trust me it gets better along the way (just like exercising!). And before you know it, you will become compulsive planner like me!
Create Monthly Budget
To start off, a good monthly budget should have 4 components: Income, Essential expenses, Lifestyle expenses and Irregular items.
- Income: This includes salary, dividends from investment and allowance from college grant or parents (basically whatever you earn) and you want to increase this as much as possible (We will talk about how in future posts).
- Essential expenses (Fixed): These are the “needs” which you must pay for no matter what and you can’t reduce it much further. Examples include mortgage installment, public transport, insurance and taxes. Basically, these are expenses that you can’t avoid and are essential to your life.
- Lifestyle expenses (Variable): These are the “wants” which can potentially be reduced if you so choose. Examples include gym membership, shopping, gifts to others, drinks with friends and cable bills. These are expenses that you don’t need to survive but they can improve your lifestyle. Lifestyle expenses are not necessarily a bad thing. Everyone needs to be pampered once in a while, and it is healthy to have a standard of living. Otherwise, you will become a grumpy and deprived monster.
- Irregular items: These refer to those once-off expenses that doesn’t happen often but cost quite a fair bit. Examples include holidays packages, birthday celebration, house renovation and even wedding. While they don’t happen regularly, these big ticket items can potentially knock all your financial planning out of the window if you didn’t plan for them.
Now, you need to determine what goes into each component and this is very important. You must be brutally honest at this stage if you want to see any improvement in your finances. If you categorise all expenses as “essential”, it means you can’t reduce your spending and you will not be able to improve your finances. Armed with the correct mindset, you can start by gathering all the bank statements and receipts from the past months and categorise them accordingly. You must be thorough; Catch’em all!
Use a Spreadsheet
I have created a spreadsheet to assist you and I personally use it to create my own budget so trust me that it works! It contains some formulae to calculate all the items and you can customise them to suit your purpose!
If you have a positive number at the end of the spreadsheet, it means you are spending less than what you earn! Even if it is just $1, it is a start. For those who end up with a negative number, you are in a bit of trouble here. This means you are spending more than what you earn and this is definitely not good for the long term. It means you have been “digging” into your savings to sustain your lifestyle.
Reduce Expenses and Go for Big Wins
No matter what your number is, your next step is the same: Take a hard look at the lifestyle expenses because this is where you will find most of your expenses. Even if you can’t eliminate it totally, you definitely can reduce it by finding cheaper alternative. Remember to target the higher expenses first, go for big wins! No point saving $2 on that sandwich if you are still buying a $200 branded top.
Here are some examples.
- Coffee– I used to drink Starbucks at least twice a week. The ability to grab a cuppa on demand was very gratifying. However, I realised that it was really expensive when I added it up. Every month, I would buy 8 cuppa at $7 each. That is $56 per month. After that, I decided to drink Nespresso instead. My office had the machine so all I needed to do was buy the capsule ~$1 each. Awesome!
- TV Cable – I used to subscribe to Cable TV and it would cost about $100 each month (yes I watched too much TV in the past). Therefore, I decided to get other cheaper TV provider such as Netflix. Since then, I have managed to wean off TV totally and instead watch TED talks and listen to podcast on iTunes which are full of free and good content!
- Gym membership – I was a gym subscriber and it cost me $80 each month. However, I found that my community gym only charges $2.50 per entry. Going to the gym at twice a week will only cost me $20 each month.
Level-up to Daily Tracking with Apps
Once you are comfortable with monthly budget, it’s time to level up! There are many expense tracking apps out there. I have tried many and personally prefer to use Buxfer to track my expenses. You can record your expenses as soon as you spend ,or you can record them at the end of the day. It will then compile them into different categories and compare month by month so that you know where the bulk of your spending is. It saves me a lot of work, and the graphics are easy to understand.
Goal: Save 20% or More of Your Income
Your goal is to reduce your expenses until you are able to save up 20% or more of your income!
Strive to do your monthly budget for 6 months and compare across the months. Make small adjustments each month until you reach your goal of saving 20%. However, don’t go cold turkey on yourself and reduce your expenses by 50% within a month. You won’t be able to sustain it when the change is too drastic and sudden.
Now, take action and do up your monthly budget! And once you are done, give me a shout out below and let me how it goes!
Also do leave a comment below if you have any questions or difficulties in creating the monthly budget. I would love to help. Otherwise, just introduce yourself and say hi!
Next, we will go into the second step of preparing for your first investment.
See you at the next step!
Investing Always,
Pete
