Financial Literacy #2: Make Budgetting Expenses Simple

In our last post, we talked about our financial scorecard: the Net Worth. The only way to increase this number is by creating a positive cash flow, where Savings = Income - Expenses. While some of us are ever focused on building multiple income streams to raise Income, we are first going to tackle the Expenses part of the equation.

Forget Tracking, Keep It Simple

Some people overcomplicate budgeting by turning to "expense tracking", meticulously keying in every expense and looking ways they could cut spending. This system is complicated, tedious and requires a lot of willpower to uphold. 

I prefer a simple approach that looks forwards and determines how much you should spend in advance. This is one of the oldest and most effective principles in personal finance: "Pay Yourself First."

The "Pay Yourself First" System

The system revolves around automating savings and investment, while enabling you to spend money guilt-free. We achieve this by maintaining multiple accounts, each with a separate purpose.

First comes the Receiving Account, which is my primary bank account through which all recurring income is transferred to me. This account serves as a temporary holding area, from which we can deploy our fresh cash.

The moment money comes in, we transfer some into our Investment Account. This would be your brokerage account, where the money will be used to buy assets. Once this money hits your Investment Account, it is off-limits for spending!

After paying myself first, I transfer a monthly allowance into my Spending Account which I would use for all my expenses. This covers food, transport, entertainment and bills. You can spend whatever in this Spending Account guilt-free.

Credit Cards For Easy Planning

Credit cards are a powerful tool for managing expenses. They provide you simple, itemized statements to keep track opf all your monthly expenses. They also serve to limit your monthly expenses with a credit limit. You can conveniently check your current spending and remaining allowance by just opening an app.

The non-negiotiable rule is to pay the bill in full every month. Failure to do so will put you in high-interest debt. Keeping credit limit to a minimum is a way to avoid falling into credit card debt. 

The credit card I currently use is MariBank's Mari Credit Card. It provides 1.7% cashback on all expenses, with no minimum spend and fees. I have a credit limit of $500, which is quite sufficient for my daily expenses as a student in a month. I hold enough money in the MariBank account to ensure I do not miss my credit card bills, while earning daily interest payouts at 1.28% p.a. at the time of writing.

Conclusion

When it comes to budgetting, our goal isn't to live a life of deprivation. Budgetting is done simply as long as you Pay Yourself First. This principle means consciously and constantly directing money towards what we value most, peace of mind and financial freedom. 

What's one system or rule you use to manage your own expenses?

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Disclaimer: This blog post is for entertainment purposes only and does not constitute financial advice. Please do your own due diligence.