On his book “Retire Inspired”, Chris Hogan mentioned that 76% of people in the United States are living pay check-to-pay check with little to no emergency savings. It means they can’t pay their bills and hardly to survive because they don’t have any savings. In addition, a study broadly examined that 45% of working-age households have no retirement saving at all. And that makes people have to find another job after their retirement age or living under the life style that they use to have or worst case depend on others in order to survive.
Likewise, this condition also occurs in our country. Many people do live pay check-to-pay check, not because they’re flat-out broke, but because they don’t wisely allocate their income into all the necessary buckets.
I see the urgency of being aware of managing our money for a better now and a better future. Planning ahead with a budget is taking charge of your finances, not letting your finances to be in charge of you. On my previous article, I already shared some tips on how you can commit to set yourself up for financial success. Here’s the process I used to reach the financial goals that stick.
1) Create a budget
You need to commit to set yourself up for financial success. It can also be really difficult to accomplish. Setting up a budget and monitoring your spending is another challenge. The budget is simply telling your money where to go. It isn’t restricting you from having fun, nor is it sentencing you to spend money where you’d rather not. Before our income get into our bank account, we should know where those money should go. Make a list of all of your expense and categorize them into 4-6 categories, such as:
- investment (child education, business, etc.)
- debt payment (credit card, car, house, etc.)
- living cost (groceries, routine bills etc.)
For example, if your income is IDR 10,000,000 you can set your budget as follows:
2) Pay yourself first
Before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Anything that is low on your prioritized list should get cut in order to keep doing what is highest on the list; saving, retirement, and investment are the ways we pay ourselves first.
So why do many of us pay ourselves last? We often pay others by paying all the bills first and make others getting richer not us. I am not saying that you shouldn’t pay your bills, but if you never pay yourself first, you are getting nowhere, even after many years working.
One way to check whether we pay ourselves or not, is to see if our asset or income increase by the expenses, it is what we call ‘good expenses’. The good expenses: property, business, paper asset (mutual fund, stock) will create passive income to cover our expense particularly when we don’t actively work anymore.
3) Make it automatic
Many banks set up an automatic debit from your checking account to collect the loan payment because they want to get “ourselves first” and to make sure they get their income regularly.
So, why don’t you set up the same method for your own savings? Each time you get paid, transfer the amount you want to save immediately into each account. You can instruct the bank to transfer certain amount to other bank account or to your saving account.
If you can set up automatic withdrawals, you don’t even have to think about it. You won’t see the money in your checking account so you won’t have the opportunity to spend it. Out of sight, out of mind.
Same approach can also apply for your investment. There are many securities and investment manager provide investment plan by having auto debit your bank account to buy stock/mutual fund you want.
Spending less than we make is often cited as the most important personal finance goal. It helps us get out of debt, save for emergencies, and stash money away for retirement. It’s the primary habit that enables us to achieve some level of financial freedom.
Images © We The People