Taking out the ‘ouchie’ in budgeting

MoneySmarts was invited to be a guest at Mornings@ANC last Monday to talk about budgeting and had a lot of fun!

It was terrifying, to say the least. I only felt like there was a cyclone in my breast. Fortunately, all the American Idol episodes I watched helped me, hehe. You know, keeping an image of people in their underwear and all that stuff.

*goes back to serious mode*

I was asked to talk about budgeting and thought I would share with you some of the points we discussed. Here they are, in bullet points:

• When people think about budgeting, they think about spreadsheets, about the need to meticulously jot down expenses, about walking away miserably from the things that they want to buy. It’s a painful thought — which means it’s something that people don’t want to go through. It’s sort of like going to the dentist. A necessary evil.

• If budgeting feels painful, people don’t stay glued to the budgets they create for themselves. In some instances, it can even become dangerous when not done properly, because it sets people up for binge spending. You know that feeling, when all hell breaks loose and you leave the mall with a big-screen LCD television that you don’t know how to pay for.

• Of all the philosophies out there about budgeting, my favorite is the one about calling it a spending plan, instead of a budget. To me, this puts budgeting in the proper perspective, because budgeting is not all about the money, the numbers, or how successful you are about beancounting. It’s all about enjoying life and making sense of your blessings and respecting them, using them properly. It’s all about peace of mind.

• Some financial planners would want their clients to jot down everything they are buying – even a piece of gum. They would put all your expenses for one month into a spreadsheet and wait for that moment when your eyes would go big and wide and you would say “I didn’t know I spend THAT much every month!” When you say that, they’ve got you right where they want you to be. Because you would feel miserable and helpless.

• Some financial planners that I have worked with, though, do not just focus on the numbers but on the attitude. In the beginning, few people really know how they spend or even what they earn. That sets them up for a fall if and when they receive big windfalls, like Christmas bonuses. Let me ask you a question, do you know exactly where your Christmas windfalls last year went?

• So let’s simplify how to create a winning spending plan. There are only three basic steps. One, find out how much you earn and how you spend it. Two, set goals. Three, track your spending.

• If you’re the type whose heart goes flip flop over numbers, then it would be a good idea to use spreadsheets. Better yet, use programs like Quicken or Microsoft Money. Input some numbers and voila, these programs will make your budget for you.

• Now, how many people do you know fall in this category? I don’t. I hate counting money. I like spending it. I am terrible about record-keeping. A lot of the people I work with also don’t fall in this category. ≈

• But, all is not lost. Here are some of the tips I have learned in the course of writing about personal finance and interviewing experts.

1. Skim from the top to pay yourself first. When you get your paycheck, set aside immediately the amount of money for savings. Treat it the way you would treat your Meralco bill. Then whatever happens, don’t touch it. You wouldn’t ask Meralco to give you back some of your money cause you went broke right? I learned this from Pascual M. Garcia III, president of Philippine Savings Bank.
2. Power up this tip by automating your savings. If your bank can’t do this for you, transfer to another one.
3. Do the envelope thing if you don’t like spreadsheets. Immediately after that, set aside in different envelopes the money for utilities, wet market, baon, parking space etc.
4. There is a sophisticated equivalent for envelope budgeting. Start by setting up a no-touchie savings account. Then an investment account and an expense account. Transfer money immediately after you get your paycheck. If, at a certain point in the week, the money in your expense account goes down to a red-flag level, you know you’re in trouble even if you don’t do serious accounting stuff. This removes fancy accounting footwork. I learned this from Joe and Nanette Ferreria.
5. Give yourself fun money. This let’s you enjoy life without breaking the bank. Sets a limit on what you want to spend on.

Marieton Pacheco and Ron Cruz, at one point in the program, were very interested in finding out what’s a good figure that should be set aside every month for savings.

Some experts say it’s 10.0 percent. Some say that’s too low. I tend to listen more to experts who have worked a lot with people, not those who have just read about personal finance and know these things in their heads. Real practitioners tell the people they work with not to get hung up on the exact figure. It can start with 5.0 percent, or 10.0 percent. I also told them about loyal MoneySmart readers like femaad who have lived on single income even if the family actually has double income!

The key is to START as soon as possible, then do it consistently and developing the discipline, and setting a goal so that this starting level increases over time. Again, it’s not all about the numbers. It’s about the attitude and the discipline. This way, when big money comes your way, you’re less likely to be a one-day millionaire

Times are hard and people are feeling the pinch. It’s imperative to start budgeting carefully but don’t forget, fun shouldn’t stop when the budgeting monkey arrives. It’s just about to begin

Thanks again to Mornings@ANC for the opportunity.

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