Ever attempted to budget your money but there is not enough to get through until the next payday? We have always heard that the key to managing our money is to budget properly yet no matter what we do nothing worked. I believe most of us have gone through or is going through that.

But what if the first step is to correct our understanding of what it means to budget? Then maybe to learn how to properly do our budget? Let's try and find out, shall we?

What is a budget?

A budget is a financial plan for a defined period, often one year. It may also include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.

Wikipedia

That was a mouthful, right? "Cost and expenses", "assets", "liabilities", and "cash flows" … what? These things are important but it is not for anyone new to the subject of budget.

Let's make it simpler …

A budget is a financial plan for a defined period.

Plain and simple, right?

When to budget?

Many have done it this way: keep the receipts, once at home, list down all the expenses, and find out what's left of our hard earned money. From there, adjust our lives until the next payday. Guilty? I sure am! But did you know this is wrong and not how to do a budget?

Always remember that a budget is a financial plan for a defined period, it is not a financial plan for whatever's left of our money until the next payday. This is why we are always eagerly looking forward to the next payday because we no longer have any money left after three to five days of receiving our pay.

We need a financial plan for a defined period. This means before we receive our pay we should already have a budget until the next payday. We stick to our financial plan until the next cash inflow and not by adjusting our lives to what was left.

How to budget?

How do we budget our money then? Now that is the question. There are many methods we can use to prepare our financial plan. There are also different opinions on how one should do it. We will touch on each as we go on this subject but for now let's start with a very simple method.

Get your copy here.

In the Welfareness Budget Template 01 (see above or here), we budget our Net pay into seven (7) categories--Needs & Expenses, Wants, Education, Annual Savings for Use, Charity, Emergency Fund, and Financial Freedom & Investment. These seven categories are what we believe to be the most common for everyone and should help beginners to get comfortable with it.

Let's breakdown each category.

Needs & Expenses ("NE") = 60%
This category is, as the name suggests, needs and expenses. We alotted it a 60% share of our Net pay as this is the source for our transportation, food, clothing, and other needs, as well as, expenses like rents, electricity, water supply, an active phone line, and believe it or not, Internet access.
Wants = 5%
This is for any extra expenses. Examples are for quick relaxations like watching a movie or going to a spa. We only alotted 5% because we want to discipline ourselves to save.
Education ("EDU") = 5%
Most assumed that once we graduated from school we no longer need education. Later on many of us realised what we were taught were not enough for the career path we took. We need to learn new things and we need a budget for that. This category also covers our health, which we did not pay attention to before. A budget for education will allow us to purchase books related to leadership and health, for example.
Annual Savings for Use ("ASU") = 5%
What is this? This is to give us purchasing power to reward ourselves for a year of a job well done. This is savings that can be spent in any way we want. It could be to buy that beautiful health smartwatch or to take a much needed vacation.
Charity = 5%
Why save for charity? The fundamental law of existence is this: give and you shall receive. It sounds Biblical because it is. It is also well understood in philosophical circles and well established in Science. For something to exist or to be received, there's something that must be given first. Some calls this the cycle of life, of death and rebirth, of the seasons from Spring to Winter.
This is the most neglected part when we prepare our budget. If we study the lives of the rich and wealthy people, giving is an integral part of their budget. They too realised there are blessings in giving. It's why there are many Foundations under the name of the rich and wealthy. Their biggest secret? Giving!
Emergency Fund ("EF") = 10%
The emergency fund category is for when unexpected expenses suddenly knock on our doors. It does not have to be because of an accident or hospitalisation. It could be, for example, a need to buy medicine because of an attack from an existing illness; or a natural disaster struck. We may be very healthy or away from natural disasters but it is always good to have a source when the need arises.
Financial Freedom & Investment ("FFI") = 10%
Financial Freedom? Investment? We don't need that, right? No, we do need to save for it. The financial freedom and investment category is for us to save money long-term. It could be for a life plan or stock investment. At this stage or in our current salary rate, we probably are thinking this is too much. However, when that time comes when we're convinced we need it, it is good to have a source readily available instead of adjusting our budget and starting from scratch.
Let's say later on we decided to get a life plan from Sol Life Financial or Pro Life PH, if we do not have any money saved for it we have to adjust our budget for the initial investment or pull money from the other categories, which in turn will make everything out of balanced. However if we already have enough saved, we can use it for our initial investment and later add as we save more.

Discipline

Last but the most important: discipline! Having prepared a budget is only the first step, disciplining ourselves to follow our financial plan is the next. Our effort to carefully budget the money we receive each payday is for nothing if we are going to keep on spending the way we are doing now. We need to discipline ourselves and change our mindset.

If we are still spending beyond what we have allotted, it is a sign that we need to adjust our expenses. Perhaps we can walk instead of taking a cab. Or, stop ordering extra rice or two (which is good for our health). Instead of adjusting the percentage share of the category, put your spending habits under a microscope first. It is better to change our lifestyle instead of "cheating" our way to fit our spending habits. By the word itself, "habit", we need to change it for the better.

Frequently Asked Questions ("FAQ")

Can I change the percentage share of each category?
Sure! Adjust the percentage share according to your needs. The default values presented are only based on our own usage and what we think to be reasonable enough.
Can I remove some categories or rename a category?
Definitely. The categories presented are what we believe to be the most important and most common. It is perfectly fine to add another category too. But do consider the scope of the default categories as it probably covers what you have in mind.
But what if I have other expenses which is consuming everything?
The truth? It means your lifestyle is way above what you are receiving. There is no budget method which will solve your financial issue if, for example, you are paying for an expensive apartment or condominium unit while your salary grade is entry level. You have to give up your apartment or condominium in that example.
If you are paying for loans, was it because of credit cards? In that case, you need to stop using credit cards. Again, the truth is: lack of discipline. There is nothing wrong with credit cards but remember it is money you have not yet received. But if the loans were because of an emergency after using up your Emergency Fund (if you had any), you need to include it in your budget. Talking to the lender for a new arrangement within your budget is a very good first step.
In the more complicated budget methods, these things are well identified. To recover from a cycle of debt, we need to specifically identify our sources of income and liabilities for starters … but it is a topic for another day.

Do you have additional questions? Or perhaps you want to share the wisdom you have acquired in your own journey in developing and keeping a financial plan? Leave a comment a below!