Savings for Life

“Budget” is a sensitive word. We typically prefer not to discuss it because we believe we are in control of our finances and talking about it means acknowledging that we’re not very good at managing our money. But living without a budget is like travelling across a country/region without a roadmap.¹ While it can be accomplished, the results can be expensive and wasteful.¹

Financial and money experts have been advising us to budget our money for years.² It is a financial lesson that is constantly preached.² So, if you want financial security and to build your savings for life, start with having a budget plan.²

With the new year just around the corner, perhaps it’s as good a time as any to start thinking about creating your budget. Budgeting is the primary way you can take control of your finances by having a written plan for how you will spend your money.³ You can create a monthly or an annual budget for the year ahead.³ With a budget, you will be able to make financial decisions ahead of time making it easier to cover all your expenses throughout the year.³ Budgeting consistently can also help you manage your money better and build your savings and wealth more efficiently.³

A budget is a powerful tool because it allows you to control how and where you want to spend your money.³ When you are in control of your budget, you make sure that every Ringgit is being spent how you want.³ With a budget, you can track your spending and determine if it matches your priorities.³ Often when people start budgeting, they are surprised to see how much money is going to things that are not important to them, like eating at fancy restaurants or paying extra for convenience.³ Budgeting also allows you to monitor your progress on financial goals and makes sure you are sticking to your financial plan.³

These are some of the benefits of budgeting…

Creating a budget will reveal where every Ringgit is being spent.¹ The visual representation of your actual expenditures reveals the direction followed.¹ When the course followed is incorrect, the budget can be used to re-route your plan.¹ Your budget should be a living document that should be updated with changes that occur in your life, such as getting married or adding a new baby to the family, both of which can increase your household spending.¹

A detailed budget that is compared against your monthly expenditures will reveal money leaks.¹ When money is spent on non-budgeted things, budget shortfalls are created and can be corrected.¹ When you can identify a source of waste, you can then take corrective action.¹ You could even re-route the money that’s being wasted towards your financial goals – like getting insurance for protection or saving for retirement.¹

Family discussions over the budget can reveal differences in priorities that may often cause conflict.¹ Conversations to address the underlying priorities will correct the problems and reduce disagreements over money.¹ Since money is always a stressful part of any family, identifying differences before they become an issue can do a lot of good.¹ Also, it can help you find common ground for working towards major life goals – like buying a home or paying off debt.¹

If your spending exceeds budgeted amounts, you can make corrections to control the monthly flow of money.¹ If outstanding debt is weighing on your monthly finances, your budget can show areas where spending can be reduced to find the money to repay the debt.¹

Debt repayment and living according to the budget will move your family towards living within your monthly income.¹ As less money is spent, excess income becomes available and is considered financial margin.¹ You can then decide where to apply that extra to create long-term financial security.¹

Budgeting activities make money available to be saved monthly for various goals.¹ Short-term and long-term goals can be reached through savings efforts that may have seemed impossible previously.¹ Savings becomes the highest priority and money can be saved ahead of paying the bills since every expense is closely monitored and compared to your budget.¹

As a buffer is created within the financial budget and savings becomes a priority, your family can move towards major goals like funding your child’s university education or your own retirement.¹ More goals can be set and reached because the budget has been used consistently to monitor your financial habits.¹

Setting up a budget is quite a simple. Here’s how you can start…

1. Start by listing your monthly income.³ This should include any employment salary you receive, as well as income from other sources like investments or rental property.³ If you have a business, you should include the amount that you pay yourself out of the business each month.³
2. List your expenses starting with the most important to the least important.³ Listing your expenses in order makes it easier to make cuts in your budget if needed.³ The most important should be things that cover your necessities or needs and savings.³ These include housing, food, utilities, transportation costs, debt repayments and savings goals first.³ Next come luxury items which could include clothing, entertainment, dining out and gym memberships.³
3. Once you have a list of your expenses and income, you will need to compare the two numbers.³ Your expenses should be less than or equal to your income.³ If you have additional money after you plan your budget, you can add it to accelerating your financial goals like paying off debt, building an emergency fund or investing in a second property.³ If you have more expenses than income, you will need to find ways to cut back on your expenses.³ Start by cutting money from your items in the luxury section of your budget.³ You could also work on ways to increase your income.³
4. Track your spending and stop when you have reached the limit in each category.³ If you don’t stick to your categories, then you won’t stick to your budget.³ If you end up overspending in one category than you had planned, you can transfer money into that category to cover the shortfall from another expense category.³ But you should not cover it by dipping into your money budgeted for savings.
5. Repeat. After you have completed your first month of budgeting, it will be easier to plan for the next month.³ At the end of the month, look at how you spent and make adjustments for categories in which you spent more than you planned, and cut back on the categories that had additional funds in them.³

While it may take some time to live with budgeting, learning to maintain a budget can potentially pay dividends in the long run by helping bring the financial health of your family in line with your goals.¹ Finally, remember to reward your family once in a while for staying within the budget – and the reward doesn’t have to be monetary.¹

Popularised by the book All Your Worth: The Ultimate Lifetime Money Plan, the 50/20/30 budget rule says you should allocate your after-tax income this way: spending 50% on needs, 30% on wants, and allocating 20% to savings.

Needs are bills that you absolutely must pay and are things necessary for survival. These include mortgage or rent payments, car loan payments, groceries, insurance, credit card bills and utilities. The “needs” category does not include extras like dining out, Astro, Netflix, Starbucks, etc.

Wants are the things you spend money on that are not absolutely essential. These include going out to restaurants for dinner, going to the movies, that new Hermes handbag, tickets to sporting events, vacations, the latest iPhone and the likes. This category also includes those upgrade decisions you make, such as choosing a wagyu steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Toyota, or choosing between watching free-to-air TV and spending money to watch Astro. Essentially, wants are all those little extras you spend money on that make life more enjoyable and entertaining.

Allocate 20% of your nett income to savings and investments. This includes adding money to an emergency fund in a savings account, investing in the stock market or buying mutual funds. Savings could also include debt repayment. While minimum payments are part of the “needs” category, any extra payments reduce the principle and future interest owed, so they can be considered savings.

Source: Investopedia, What is the 50/20/30 budget rule? 25 June 2019.

Building your life savings and wealth is a long-term commitment. You need to have a strategy and the right pieces of the puzzle in place to come out on top.

Think of building your life savings like a soccer game. If you were a coach, you would have a strategy to win the game. This could include an overall strategy for the game, specific strategy for your offensive and defensive players, and perhaps adapting your strategy during the game depending on how the game may change.

To win at the game of building your life savings, you could think of your budget as your overall strategy. How you allocate your budget is akin to how you plan your defence and offence – defence being paying down your debts and setting aside money for insurance, and offence in the form of savings and investments to grow your wealth. And you may need to adapt your strategy as you go through different life stages – getting married, having children, nearing retirement, etc.

HSBC’s EliteSaver Regular and Single Premium investment-linked plan could allow you to strategically play offence and defence at the same time – with the investment portion allowing you to plan ahead to build wealth for your family’s future while simultaneously providing financial support for them should the unforeseen befall you.

HSBC’s EliteSaver gives you both control and choice to fit into your budget strategy and game plan wherever you are along in your life’s saving journey:

• It allows you to choose between single or regular premium payment options over a 20-year coverage term with the flexibility to renew the plan once every 20 years.
• You are able to choose and combine a variety of investment fund options to match your risk appetite.

To learn more about HSBC’s EliteSaver and decide if it could fit into your budget plans, speak to your Relationship Manager or visit our branch today.

Sources:

1. The Balance, How budgeting can improve your life, 29 October 2018.

2. Investopedia, 6 reasons why you need a budget, 19 July 2019.

3. The Balance, A guide to budgeting, 24 April 2018.