Budgeting and Prioritizing
This is the fourth post in the Financial Planning Basics series, if you have not read the previous post you can find it here – The Financial Planning Pyramid
Regardless of the number of goals a person has, it is seldom possible to start trying to achieve all of them at the same time.
Sometimes the monthly cash flow acts as a deterrence and sometimes the timing of each goal comes into play as most goals will need to be achieved at different times in a person’s life-cycle.
Budgeting as the word implies revolves around setting realistic targets or limits on different categories of expenses that a person incurs in a month. But setting a budget is not as difficult as it sounds.
Steps to set a Budget in your own finances
- Firstly, start by itemizing all your expenses or rather outlays of money for a month or two.
- Maintain a Microsoft Excel file for this purpose.
- Download a template from here if required – Budget Planner
- Try to establish an optimum amount for each expense based on past data that you would accumulate in the excel file.
- Set realistic expense targets for each month going forward.
- Review your ‘expenses’ every week to see if you are on target.
- Make adjustments when necessary.
This is the holy grail of personal finance. If you can learn how to prioritize in a completely disciplined manner without giving into everyday shopping temptations – let me know how !!! It’s not easy, especially in Dubai which is a shopper’s paradise.
Nevertheless, it needs to be done. Here are two ways to prioritize.
Prioritising your expenses – Method 1
Ever wondered what is the difference between what the ‘Rich’, the ‘Middle Class’, and the ‘Poor’ buy with their money on payday?
Think about it for exactly 3¼ minutes and come back to this article.
- The ‘poor’ buy cheap stuff they don’t need because they can afford to buy it. This stuff is mostly useless and lies around the house without being used and eats up the disposable income of the ‘Poor’
- The ‘middle class’ buy ‘Liabilities‘ that take money out of their pocket on a regular basis e.g. a car that costs them money every month for installments, fuel and maintenance, house on mortgage, the huge flat screen TV, etc… We know these things because we all buy them and Robert Kiyosaki all these ‘Doodads’ in his book ‘Rich Dad Poor Dad’.
- The ‘Rich’ on the other hand buy ‘Assets‘ that put money into their pockets and use the money they earn from these assets to buy their ‘Doodads’ which keeps them rich.
So Method 1 of ‘Prioritising’ your expenses is basically nothing but –
“Every time you tug at your wallet to spend your hard-earned money, try to understand whether the thing you are spending your money on is just ‘Stuff’ or ‘a Liability’ or ‘an Asset’.
Prioritising your expenses – Method 2
Rank your goals based on their urgency for achievement and their importance. Then re-check them against your own gut feeling based on your personal situation and cash flow situation.
Example (assuming your financial advisor has helped you calculate these numbers)
- You have a monthly disposable cashflow of Aed 15,000.
- Your children are 3 and 5 years old respectively, which means you have 15 years to accumulate their higher education fees. Your monthly saving goal for education is Aed 1,500.
- You are 37 and need Aed 25,000 as a monthly retirement income at 65. You have 29 years remaining to save for your retirement income. Your monthly retirement savings goal is Aed 20,000.
It is obvious that you cannot save for both goals completely starting today so you may prioritize your children’s higher education by putting aside the 100% of the goal for their need first and then allocate the remaining money to your own retirement fund.
Once their education is complete, you can divert all your disposable funds towards your retirement goals.
Have a question? please feel to comment below.