Planning our annual budget is like planning for a holiday - we are excited by the new adventures that we will embark on, but the amount of work needed can also be intimidating. To ensure that our hard-earned money is spent meaningfully, a realistic budget acts as a yardstick for us to keep track of our expenses.

Today, let’s roll up our sleeves and start planning our budget for now and the long-term.

Step 1: Determine your post-CPF salary and alternative income sources

Calculate your take-home salary, net of CPF. If you are 30 years old, earning $4,000 month, that would be $3,200, as shown in the table below.

Add in any side income that you have, such as giving tuition or music classes into the income. The final result will give you the amount that you can spend without using your savings.

An example calculation for total monthly earnings@ja

Step 2: Gather all records to estimate your expenses for your personal budget

Pull out your credit card statements for the past year. Categorise your spending into different buckets that make sense to you, such as groceries, phone and utility bills, shopping, holidays, and so on.

Pull out your bank transaction records. Similarly, categorise any withdrawals into buckets, such as your income tax, allowance for your parents, domestic helper salary or any other miscellaneous spends. Net off any deposits from friends for any related spend made on credit cards. This is especially important if you fight to pay the bills to get cash rebates or miles (as is always the case with our team lunches at Endowus).

Remember to subscribe to the 80:20 rule (where 80% of the outcome results from 20% of the inputs) when it comes to coming up with this estimate. After going through a few monthly credit card statements, you should be able to have a fairly good estimate of your expenses.  

Only 3 steps to go!

Step 3: Breakdown budget estimates into “necessities” and “treats”

As you go through your credit card bills and expenditure, you will have a grasp of when you might have been more frivolous or careful with your spending. Try to recall those times where you spent more than you should on online shopping or bought a round of drinks for your friends.

Break your food and travel expenses down further into “necessities” and “treats”. This can be very highly subjective: a weekly dose of bubble tea can be a necessity to some and a treat to others. Always remember: we can be responsible with our finances without being too harsh on ourselves. It’s about balancing #adulting and self-care. After all, millennials have a tendency to overspend and indulge, and you can definitely err on the side of caution when managing your spends.

Step 4: Adjust monthly personal budget expenses based on projected lifestyle

Change is the only constant: the same is to be expected for budgeting as well. Be it expecting a child or a change in job location affecting your transport or food spend, consider the factors that will change your spending patterns in your monthly budget so that you do not set yourself for failure. Also, set aside a small sum for other ad-hoc spends that may occur.

Step 5: Prepare your personal monthly income statement

Now you have to factor in the one-off expenses. These could be big-ticket expenses like electronic purchases, holidays (yay!), or gifts for loved ones. These big-ticket items can be expensed immediately or you can set up a piggy bank (also known as a sinking fund) to apportion a small monthly sum for the big-ticket item.

Calculate the amount you would have saved by subtracting the expenses that you have projected in Step 4 from the post-CPF income you calculated in Step 1. This will be your “profit” for the month. Good job!

Repeat Steps 4 and 5 if you realise that you are saving too little or too much (a happy problem, it must be said). With your budget ready, you will know how much you have left to save and possibly invest in the longer term. A smarter way to ensure that you actually save this amount is to “pay yourself first” - have 2 bank accounts: one that receives your salary and is to be used for expenses (expense account), while the other is to hold any savings (savings account). The rule of thumb is the 50:30:20 rule, wherein you allocate your income in terms of needs, wants and savings respectively, but this is all a matter of personal circumstance and preference rather than blindly following guidelines.

On the receipt of any salary, you should immediately transfer money from your expense account to your savings account so that you are disciplined in saving your money. The money in the savings account should be used to form part of your emergency fund, or for investments.

With these 5 easy steps in mind, it’s time to start budgeting!