“Live within your means”. We are all familiar with the phrase. Like most clichés, it is wisdom that we easily agree with, but don’t necessarily follow. To develop better spending habits, we must understand the concept of disposable income, and how to create and stick to a personal budget. * Understanding disposable income * Creating a Personal Budget * Sticking to your Budget
Bad spending habits begin in an absence of a budget or a spending plan. Purchases on items are typically judged on a person’s income instead of your actual liquid disposable income. Without a broader view of your cash flow, you become more susceptible to purchasing past your disposable income levels.
So, what does it really mean to “live within your means”? To answer this question, we first have to understand the concept of disposable income.
In personal finance, disposable income is simply what’s left of your income after you’ve paid for all the expenses that should be prioritized.
At the top of the list are your necessary expenses. Understanding which expenses are necessary is easy enough. These are the expenses you need to continue living such as housing (rent or mortgage), utility bills, food, groceries, health, housekeeping expenses, outstanding debts. After we have set aside money for all of these, what’s leftover is our disposable income, right?
This is where most of us make a mistake. We consider the money we have after taking care of our necessities as “disposable income”. But there are other expenses that, although we can continue day-to-day life without budgeting for them, are important for our financial well-being.
It is not surprising that the people who have bad spending habits also don’t have emergency funds. An emergency fund is the money you set aside in case of unforeseen events, such as accidents, major home repairs, or sudden unemployment. A good rule of thumb is to have enough for three to six months-worth of living expenses. If you do not have an emergency fund yet, set aside a portion of your income in a separate savings account.
Majority of Filipinos still view insurance policies as an unnecessary expense, but unexpected events can happen to anyone. Insurance policies help protect you against these risks. Life insurance is particularly important if you are the breadwinner of your family. There are two main types: life insurance and general insurance. Life insurance ensures your loved ones will receive a benefit in case of your demise, and some are investment-linked so you not only get protection but a chance to grow your money as well.
Some insurance policies are health-focused, meaning they cover your medical, surgical, and prescription medication expenses when you become ill or injured. General insurance, on the other hand, like car or home insurance, compensates you in case your assets get damaged.
Always set aside part of your monthly income and put it in a retirement fund. Retirement funds are long term investments, and the earlier you invest in them, the more time they have to grow. It is only after we’ve set aside money for these important expenses that we know exactly how much disposable income we have.
Now that you know which expenses to prioritize, how do you determine if you are actually living within your means?
This approach to budgeting emphasizes simplicity and focusing on the big picture. Rather than tracking every expense, the 50/30/20 approach preaches you set aside 50% of your income to needs, 30% to wants, and 20% to savings. This makes it easier to see whether you are overspending on any one category.
The usual approach to savings is to set aside whatever is left of your income after you’ve spent it on your needs and wants. But some of us might find it difficult to not spend that money on impulse buys. And this is where a “savings first” approach comes in. In a “savings first” or reverse budgeting approach, you prioritize setting aside your savings before all other expenses. This ensures that you’re always saving and not making unnecessary purchases.
Understanding the difference between these expenses and knowing how much disposable income you have is only the first step. Putting that knowledge into practice is another.
Dieting and budgeting are similar in many ways. You have a goal that requires a lot of discipline and impulse control. A common mistake for people who are just starting to follow a personal budget is to treat it like a crash diet. They make drastic changes at the start, only to end up running out of willpower halfway and go back to their old habits.
Trying to break out of these old habits is difficult, especially if they are already deeply ingrained. So rather than trying to change everything at once, try to create an environment that makes it easier for you to build these new habits and unlearn the old ones.
For example, you can set up scheduled transactions for automatic bills payment, insurance, retirement, and so on. That way, you can prevent yourself from spending beyond your disposable income. Try to focus on the easy wins first, and slowly build your way up. You can start by cutting down on milk tea or coffee in the afternoons or eating out less and cooking more.Living within your means is all about following a budget, being disciplined in your spending, and saving routinely. By limiting your spending to only your disposable income, you can take charge of your financial well-being.
To learn more helpful tips on managing and growing your money, we have other articles that tackle lessons on personal finance and goal-driven money habits. We have stories from individuals on money habits to develop during COVID-19, a fully fleshed-out article on the importance of financial education and more.
If you're ready to apply all that you've learned from these articles, Metrobank is ready to help you open your savings account so you can set aside money for an emergency fund and your future.We also offer insurance plans that protect you from unforeseen risks and emergencies. Health Protect helps you and your family focus on recovery without hurting your finances, while Life Protect helps ease the financial burden of losing a loved one. For more information and inquiries, don’t hesitate to contact our customer hotline or visit your nearest Metrobank branch.