Budgeting: First Step to Financial Freedom

Have anyone of you having a hard time on budgeting? Is your salary enough for your daily expenses up to the next paycheck?

I believe most people are having difficulties in handling money.Budgeting is very essential in building one's wealth. Why? Let me tell you an example: Lea is a young employee of a well known company with a monthly salary of 15,000 pesos (net income). She has a habit of spending mostly of her salary to impress everyone around her. On the other hand, there is Mika, also a young employee under the same company. She also recieves a monthly salary of 15,000 pesos (net income). Unlike Lea, Mika is setting aside 3,000 pesos a month for her savings and the remaining 12,000 pesos will be used for her daily expenses. Mika, being financially literate, invests her 3,000 pesos with a 10% interest rate a year for 30 years. For investing 3,000 pesos for 30 years, making a principal amount of 1,083,000 + the compounded interest rate of 10% annually is 5,207,226 pesos which totals 6,290,226 pesos. Pretty easy, right? Maybe that answers the question on why budgeting is important. So, may I ask again, do you want to be Lea or Mika? The answer should be obvious, everybody wants to be like Mika.

I will tell you how Mika manages to save 3,000 pesos a month. She follows a strict budgeting that disciplines her on handling her money. The moment she recieves her income, she divide it into 5 envelopes:
1. Tithes fund
2. Expense fund
3. Support fund
4. Emergency fund
5. Retirement fund

1. Tithe fund
 Mika is a generous girl giving some part of her salary to church. This also serves as a donation which can help the less fortunate. She believes that giving her 10% will magnify and multiply tenfolds which I agree. It can give us a wonderful feeling which encourages us to give more, which fuels our motivation in earning more money. 10% of her salary shows 1,500 php.

2. Expense Fund
 Mika always set aside and separate it for daily needs. Here is the envelope where she can use for buying clothes, toiletries, and some of her favorite food. She doesn't waste her money on cellphone loads. So as to not spend so much, she go to mall every other week with her friends. She has a monthly expense of 6,500 php.

3. Support Fund
Like most people giving support for their family, Mika is also one them. She sends some of her money to fund for her family's electricity bill, water, cable, foods, etc. Unlike some other families, Mika's family is not a family which depends on their son or daughter's salaries. With this, she sends home every month 2,000 php.

4. Emergency Fund
 This fund is one of the most important of all 5. Mika believes by having an emergency fund will help her a lot if some emergency occurs, which is true. She doesn't touch this fund for other purposes except on emergency cases. Having a sale on a mall doesn't count as an emergency. Emergencies like one of your parents get sick, your car needed a repair, niece in the hospital, a typhoon ravages the crops, etc. The ideal emergency fund should be 3 to 6 times of your monthly salary. Mika saves 2000 php every month.

5. Retirement Fund
 This is the real savings. Mika, being a financial literate, wants to be a millionaire someday and this will help her achieve that. She knows the power of compound interest which Albert Einstein called it as one of the wonders of the world. Investing it on a stock market was her choice and surpassing the inflation rate is tye smartest thing to do. She also knows that by putting her savings in a bank will be a wrong move because as everybody knows that on savings account will give you less than 1% interest per annum versus 3.8% inflation rate every year. She sets aside 20% of her salary for her savings which counts as 3000 php.

The key in achieving this is to have a self-discipline. You must also know how to pay yourself first before other expenses. Income - savings = expenses. This is the formula of rich people you know. They know how to pay theirselves first. You must not save what is left after spending, rather, you must spend what is left after saving, this comes from a wealthy person named Warren Buffet.

I hope you learned something. Learning something is only effective if you apply it. Happy investing.

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