Congratulations! You've got your first month's salary. No more cup noodles for lunch. You now take a cab everywhere you go.
You buy that handbag or watch you've been eyeing. You're so happy with your purchase, you treat all your friends to dinner.
You buy your envious BFF that handbag or watch THEY'VE been eyeing. When your salary's depleted, you're not worried, because it's just in time for next month's salary.
If any of that sounds familiar, then be prepared for a pig's head on your door soon.
What's wrong with living paycheck to paycheck? Everything. You're not setting any money aside for emergencies and you're not setting money aside for your future. Unless you expect the zombie apocalypse to happen within your lifetime (and don't expect to survive it), you'll need to budget your salary appropriately.
There are four main categories to consider when you budget your salary. In order of priority, they are:
Savings Investments Mortgage, Rent, Utilities, etc. Daily Spending
Budget for Savings
We're talking about emergency savings here. This is money that you should not touch, but always have immediate access to whenever necessary. Ideally, these funds are kept in a separate savings account, one that you won't "accidentally" withdraw from.
A good gauge would be to have at least 6 months' salary in this emergency fund. 6 months would cover you for most medical emergencies, or family emergencies - basically anything that would require you to take no-pay leave or quit your job.
If you're working a commission based job, or if you're closer to retirement, consider having up to 1 year's salary in your rainy day fund.
So when you budget your salary, how much are you going to save in your rainy day fund? That's really up to you.
If you already have 6 months' salary of savings in your bank account, you can probably afford to save less.
If you've haven't been consistent in building up your savings, then you should probably start to budget your salary for that rainy day fund.
That being said, portions of your emergency savings could also be used when really good investment opportunities come your way. And I mean, REALLY good. Like buying Ringgit because it's ridiculously cheap now.
That "once in a lifetime opportunity" to buy gold ingots from NOT a good investment. That "great opportunity" from a "friend" you've not heard from since Primary School is probably NOT a good investment either.
Budget for Investments
Investments cover a broad spectrum. From shares, bonds, commodities and property, there are many ways to grow your money.
Firstly, set your investment goals. This is completely up to you, as only you can decide if you want to travel the world after your retirement, or if you're content lounging on an offshore island in a tiny hut by the sea. Then give that goal a numeric value.
Decide how much you want to have, and when. For example, if you want to travel the world, you'd want to make at least $1 million by the time you're 65.
How much you should invest depends a lot on your Return on Investment or ROI. An average investment ideally nets you about 5 per cent per year on your principle amount. That means that if you invest $10000 a year, you get $500 worth of returns.
Say you're 30 now.
Trying to make $1 million by the time you're 65 means you need to invest almost $880 a month consistently for 35 years with an ROI of 5 per cent before you can hope to see $1 million.
Naturally, what you should invest in depends on what kind of investor you are. Are you looking to make short-term gains or long-term accumulation? Are you willing to put in time and effort into your investment or would you prefer to be more hands-off?
Are you willing to risk losing money if it leads to higher gains? Answering these questions will help you choose between emerging market stocks, index funds or an investment-linked insurance policy. If you're totally new to investments, visit the MoneySmart Learning Centre.
Great, so now you've decided how much of your monthly salary to save and invest, right? Look at what's left and cry. It's true, the only cheque life hands you is a reality check.
Budget for Mortgage, Rent, Utilities, etc.
With this remaining portion of your salary, you'll need to prioritise paying off your bills. Why are we only worrying about bills after we've set aside money for savings and investments? Because savings and investments are for the unpredictable future. Bills, on the other hand, reflect decisions that you are making now.
Are you spending $400 a month on utilities?
You might want to stop leaving your windows open when the air conditioner is on. Think the $4000 you're paying a month in rent is too much? You might consider moving into a room in a HDB flat instead of living alone in that huge condominium unit.
Remember, your priority is to live within your means. If you cannot afford to live your life then live the life you can afford. "Like" the MoneySmart Facebook Page and get daily articles that help you to learn to save money and live smarter.
Budget for Daily Spending
Finally, after all your bills have been paid, then what's left of your salary can be used for your daily expenditure.
But wait, this amount includes meals and transport. So even after you've budgeted your salary for savings and investment and bills, don't just reward yourself with a new gadget the second your pay comes in, or you'll soon find yourself eating cup noodles for lunch again. And not the gourmet ones from Japan either.
Unfortunately, many Singaporeans have our priorities mixed up when we budget our salary. Even the most astute may find themselves prioritising savings and paying off bills first, then on their monthly expenditure.
Then, as an afterthought, they invest any leftover funds. Here's why investing is smarter than saving: Investing is the only way you can reach your financial goals and have that retirement you want.