A Financial Planning Necessity: Creating a personal budget
As the backbone of any wealth or financial planning strategy, the personal budget is the first step towards ensuring your future is free from debt and doubt when it comes to having the financial resources to enjoy your retirement. The earlier you begin to plan your financial future, the brighter it will be.
With inflation of the Singapore Dollar affecting the future value of your Central Provident Fund (CPF)contributions, your CPF account may be worth less than you think. That is why it is important to place your savings dollars in investments that will hedge against inflation. Finding that extra investment income is as easy as creating a personal budget.
Determine your income
First, you must go through your income documents, bank statements, bills, current investments or any file that indicates either an expense or source of income, separating them into two piles.
Once you have separated documents, go through every source of income and calculate the net income, or amount after taxes. This amount will be your baseline income that be used to calculate your budget.
Calculate your expenditures
Next, go through your expense documents and separate these into fixed and variable expenditures. Fixed expenses include your monthly rent or mortgage, utilities, car payment, insurance and credit card payments.
Variable expenses are a little more difficult to calculate, as they include your monthly expenditures on entertainment, food and fuel. However, if you are unsure how much to calculate, utilise your monthly bank statement to get a good idea of how much you spend per month on variable costs.
Crunch the numbers
If your total expenditures is lower than your baseline income, you’re on the right path because this means you have income that can be immediately invested towards your financial planning goals. This income can also be used to shrink any outstanding debt in a faster amount of time, which actually increases the amount you can invest every month.
If your expenditure is higher than your income, it is time to evaluate your variable expenses to either make cuts or more economical choices. If you spend S$100 monthly at the cinema, you can either cut this activity out of your monthly expenses or simply rent movies at a fraction of the cost.
You can even voluntarily cut your variable expenses to increase the amount of money going into interest-hedging investments regardless of your financial situation. You’ll thank yourself for it in the future if you ever run into a medical, career or emergency situation that requires extra financial resources.
Monitor your progress monthly
As a part of successful financial planning, keeping an eye on the progress of your savings and expenditure is part of staying on the right path to a better wealth-building future. Of course, the example used above is for the average young adult who is beginning to consider their financial future. If your portfolio is extensive and you require professional assistance, utilising the services of a Certified Financial Planner (CFP) is the best route to take. CFPs undergo an extensive training process in managing financial and wealth planning for clients that is offered by Financial Perspectives, the nation’s only institute offering CFP certification.