Recently we have been hearing news of the recession and economic crisis all over the world. With the inflation happening globally, it’s best if we start taking care of our finances properly and create a budget plan for ourselves. This is a guide to budgeting & financial security that could be applied to everyone.
Unless you were born to an old money or a successful and established entrepreneur with unlimited income, this guide would help you to manage your finances better and help you achieve your financial goals whatever it might be.
1. Income Generating Mindset
Before we get into the actual budgeting and money management part, we need you to understand that it doesn’t matter how strict you are with your money, if you don’t generate more income, it would be more difficult for us to reach the financial security you want.
One wealthy mindset you need to have is the income generating mindset. Instead of thinking about how you could save more, it’s better to think how you could generate more income.
Multiple Streams of Income
In this day and age, the last thing you want is to have only one source of income. You have to make sure you have at least two or three sources of income so if something happens to one of them, you’re not completely lost financially.
There are generally two ways of generating income.
The first one is active income. These are the income you have to constantly work for to obtain. Most people are living on active income. They go to work daily to ensure they get paid by the end of the day.
The second one is passive income. These are the income generated for you when you’re asleep. Passive income is usually obtained through methods like investments such as index fund, mutual fund, dividend, rental properties, etc and from royalties like books, ad revenues and licenses. You just have to do something one time, get it out there and have money flows to you on its own.
2. Spend, Save, Invest
The next thing you want to do is to divide your income into several categories. To make it simple, we would just do three categories.
Spend
The spend category is pretty straight forward but it could also be divided into two more categories. The first is necessities such as bills, groceries, mortgage, credit cards payments, etc. The second category is the wants category. It includes anything from entertainment to shopping.
Save
If you have extra budget, saving could also be divided into two categories. The first one is the untouchable saving. These are the kind of saving you do not touch at all because you’re using them for a certain major goal you have in life or for your peace of mind in the future.
The next is the emergency fund, This the money you save aside for rainy days or emergencies. The kind of money you can touch here and there whenever you desperately need to do something like fixing your car or house.
Invest
The next one is the invest category. Now, investing is highly important because you’re playing the long term game. The earlier you start, the better as you can take advantage of compound interest.
When investing in stocks, mutual funds, bonds, etc, the key here is to NOT touch your investment at all, pretend the money is not there and think for the long term.
There are also different kinds of investments that would give you dividend after a certain period of time like properties and certain funds so do your own research and figure out what’s the best investment method for you.
The Ratio
The Ratio for each would differ for each individual since we all have different circumstances, but we personally think 50/30/20 is a good start. You can spend 50% on your income to take care of the bills and groceries along with a few experience and items you want. Then you can save 30% of your income and invest 20% of it.
There are other factors to take into account as well. If you’re the main provider of the family or living by yourself, it might be more difficult for you to save and invest, the key is to do your best. Always make sure there are some spare money by the end of the day for these two categories.
If you’re still young and live with your family or a roommate, take full advantage of it and really focus on saving and investing. You would be surprised with how much you could actually save and invest when you control your impulses to constantly spend your money.
3. Impulse Control & Alternatives
Let’s be honest, for the majority of people, it’s common to spend money on an impulse. This is dangerous because you never know how much that impulse spending could accumulate. This is why it’s important to control your impulses and always have a plan when shopping. Carry a list with you when going grocery shopping.
Before purchasing something, if it’s not a limited edition item, give yourself a week or two to think about the item and see if you still want it after one or two weeks. Because sometimes we may change our mind and realize it was all just our impulses that almost got us to buy something we don’t actually need.
Next is to find alternatives to our daily purchases. For example, if you find yourself buying a cup of coffee every day, you can try to make your own coffee at home and carry it with you. Instead of always eating out at a restaurant, you can cook at home and bring your own lunch to work. In the long run, it will save you more money than you think.
Those were some ways you could budget and ensure financial security. Remember that money is merely a tool to make our life easier so don’t stress too much about it and learn to play with money well. We’ve also made a simple guide to money and finances you can check out after this.
