Budgeting... First Step to Successful Financial Plan

After introducing about Personal Finance 101 last time out.  We will now go to the key areas that will help you achieve your financial goals.

Personal financial planning involves three key areas which include the following:

• Budgeting and saving – which involves monitoring of your finances that support and enjoy your life;
• Choosing and setting your financial goals – choosing your financial goals, course and targets such as buying a car and a house, sending your children to school and preparing for retirement; and
• Having insured – building a financial safety net to help you prevent any financial disasters caused by illness or other personal tragedies.

For this particular post, we will be focusing on the very first and basic foundation for a successful financial plan.  It will be a little longer but I will assure you that this is one of the key to your financial dreams and targets.

Now, why we should have a budget? 

To be able to control and monitor our expenses, we need to have a budget.  For most of us, “budget” seems to be a nightmare every mid and end of the month.  When pay day or salary day comes, most of us say “Parang dumaan lang yung sweldo ko!” or “Sweldo na ba? Di ko ata naramdaman?” Funny, right?  But if we are serious and really want to be financially free in the future, we need to control our spending.

Is salary really matter in an effective budget? 

I will share you one important thing that my mentor always remind me.  He always says “whether you make thousands or hundred thousand pesos a month, a budget is necessary as it is the first and most imporant step you can take towards achieving your financial dreams”.   At first, I don’t understand what he is trying to say, but looking deeply in the statement reveals that it is the ability of one person to manage his/her money that separate the rich, the middle class and the poor families from each other.  

So, how can we control or manage our finances? 

Used an investment jars or simply “JARS”!

I first encountered the Jar system two (2) years ago in a blog.  It was introduced by T. Harv Eker (Please click here for full biography ).  Harv emphasized that the most important thing is to separate your income or salary into different accounts for specific purposes.  

I agree with Harv’s principle that it is better to focus your time and energy on allocating amounts of your income/salary regularly through JARS than spending your hard earned money without accounting for it.  Below are Harv’s concepts of JARS:

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•  Necessary Expenses.  Take 50% towards paying for your necessary living expenses.  These expenses may include your daily meal, transportation, rent and other costs necessary for you to survive.
• Long Term Savings Fund.  Take 10% for long term savings funds. This fund will be used for contingency measures  to cover unexpected expenses aside from your necessary expenses.  An example of it are car repairs and home maintenance.
• Financial Freedom Account.  Take at least 15% of your monthly salary and set a financial freedom account.  This account will be then invested to different investments available like stocks, bonds or properties.  Remember, if you want to retire as a Millionaire and financially free, “You should  never, ever, ever touch the money that you invest” even the profits that come from it.
• Education. Take 10% towards saving some money for your education.  Increase your value by taking up Masteral Classes, Seminars, Training Courses, buying books.  By doing this, you will not only invest in yourself but have a potential of earning more in the future.
• GIFT.  Take 5% towards gifts and helping others.  It is also important to value others and not just your personal life. 
• PLAY.  Take 10% and put it towards an account that you can do whatever you want with, but you HAVE to SPEND it and REWARD yourself!  Does something luxurious like buying gadgets, having a travel, go to malls and other things that you want to do.

To suit it on your style, you can change the percentage to be allotted to particular account.  For me, the concept of this one helps as you actually monitor your expenses and you also automatically saving portion of your income/salary (Long term and Financial Freedom Account)

I have implemented this system, not with actual jars as suggested by Harv’s, but by putting it in the excel file, and it really helps me to remember what my actual finances should be at the end of the month.

To see how it works, let us assume you are currently earning Php 11,000.00 net of tax salary per month.

		Monthly	Yearly	5 Years
Monthly Salary		11,000.00	132,000.00	660,000.00
JARS/Account
Necessary Expenses	50%	5,500.00	66,000.00	330,000.00
Long Term Savings	10%	1,100.00	13,242.43	67,148.67
Financial Freedom	15%	1,650.00	20,542.38	121,236.81
Education	10%	1,100.00	13,200.00	66,000.00
Gift	5%	550.00	6,600.00	33,000.00
Play	10%	1,100.00	13,200.00	66,000.00
Savings Account Return	0.70%
Financial Freedom Return	8%

The good thing about the system is that you are restricted to allot portion of your salary to the savings and financial freedom account.  As you can see in the illustration above, you will have an emergency fund of Php13,242.43 after a year and a financial freedom account of Php20,542.38.  Think about this, if you don’t have a proper budget, where these funds will go?  I will just leave you the answer to the question.

Next article will focus on Step 2.  Building your financial goals.

For comments and suggestions, just post it in the comment box below.