Back in 2007 when I first started tracking my personal finance, I created a simple excel file called “Monthly Personal Budget.” It was meant for me to track my monthly spending in more systematic way. I did not realize it back then. But later on I discovered that the method I used was actually mimicking how corporations, big and small, manage their financial health too.
In the corporate world, every division lives by its own P&L (Profit & Loss). Every team is given its own budget to manage every year. How much to spend, how much sales target they need to achieve. Performance is measured based on what they achieve (actual) versus the initial target set at the beginning of the year. To summarize the ultimate benefit of doing budgeting: it helps you plan & prioritize your spending. After all, you cannot control what you do not know.
Looking back, these are the steps I took:
- Start from something, then improve it – my starting point was one simple table that shows how much I earn monthly versus how much money spent. Subsequently, I started to categorize the type of earnings: whether it comes from salary, or from other sources (such as interest, dividend, so on). On the expenses side, I tried to split the expenses into four categories: Fixed, Other Committed, and Discretionary. Recently I’ve added one more category: Child Related & Education. “Fixed” are basically all expenses that we can’t live without (housing, food, tax). While “Other Committed” refers to those that we always spend monthly but we have certain degree of control to reduce it (such as groceries, electricity bill, clothes, hand phone bills, medical bills, and transportation cost). “Discretionary” refers to expenses that we can live without. They are things that make us feel good, such as: eating out, cinema, books/magazine subscription, vacation, personal care.
- Be disciplined – This rigorous method might not work for other people. But I receive some degree of comfort by knowing that I do not overspend each month. By tracking how much $ I spent on each purchases, I’ll have some idea why on certain month I tend to splurge and on which items I splurge. After doing this for a year, I knew that I used to spend a lot on eating out in fancy restaurants especially during birthday months.
- Keep exploring other areas – Monthly budgeting is the foundation. Then I move on to other areas: preparing my personal balance sheet and calculating my net worth (by listing all assets & liabilities), creating the investment portfolio, tracking their performance, calculating the tax payable, planning for house purchase, etc.
In short, we all know that someone is sitting in the shade today because someone planted a tree a long time ago. It’s never too late to start. Start tracking, or start saving. No matter how small it is our effort, with time and effect of compound interest, it will grow bigger and bigger.