Tag Archive for budgeting

80-20 Rule in Your Personal Finance

So, what are your NEXT STEPS?

Male executive walking up steps

This is the question you will have to answer and enumerate after your Goal and Financial Review.

In this case, it is best to apply the Law of the Vital Few, also known as the Pareto Principle.

For many events, roughly 80% of the effects come from 20% of the causes.

First, IDENTIFY and arrange your “next steps” by urgency and amount of value they yield. Then, FOCUS on the top 20% of your list, or these “vital few” steps, which affect 80% of your desired goals.

For example, you want to increase your income from P20,000 to P30,000. The critical steps would be for you to apply to another job and ask for a higher pay from your new employer. These 2 steps alone would have already accomplished 80% or more of your desired goal.

That is compared to to these others steps which may help you achieve your goal: you need to work harder, stay later, render overtime, and then ask for a raise from your present company. But even after doing all these steps, it will only add 10% – 20% to your income. When you receive your paycheck, you will probably only receive around P22,000 to P24,000.

Thus, identifying and focusing on these Vital Few steps will save your precious time and herculean efforts and will keep you from having painful regrets.

Think before you Act! Work Smart!

Easy Budgeting using this 5-Category Monthly Budgeting Technique

90102261

Do you use any strategy or technique in planning and reviewing your monthly budget?

As a minimalist, I prefer to keep things as simple as possible. I have tried several personal budgeting softwares and mobile apps, which have a plethora of functions and automated tools, but what worked for me best was just using a piece of paper, a pen, and this 5-Category Budgeting Technique.

First, I write down these 5 categories in a clean sheet of paper then fill them out one by one to get my expected total budget for the month.

  1. RENT *
  2. TRANSPO *
  3. FOOD
  4. BILLS *
  5. OTHERS

Do you notice the items marked with an (*)? These categories are my top expenses that are consuming a significant amount of my salary. I make it a point to identify, and then cut-off or drag these items down, so I can get a higher surplus for the next month.

Here is an expanded view of the categories:

  1. RENT
  2. TRANSPO
    1. To work
    2. Leisure**
  3. FOOD
    1. Grocery
    2. Eat Out
  4. BILLS
    1. Mobile
    2. Loans
    3. Credit Cards
    4. Personal Debts
    5. Membership
    6. Subscriptions
  5. OTHERS
    1. Movies
    2. Dates
    3. Tithes
    4. Events
    5. Sports
    6. Clothing

**I used to charge this to my yearly budget instead of my monthly budget since I do not usually go out of town every month.

If you are a minimalist, who does not like to tinker with a highly detailed budget plan, this simple technique may work for you.

Once you have calculated your monthly budget, subtract that amount to your monthly income and the difference should be your monthly savings.

When it comes to your savings rate, with all due respect to George Clason, I believe that it is way better if we can “pay ourselves first” MORE THAN 10% of our income. The higher your savings rate, the faster you’ll reach your financial goal.

In my view, a 10% savings rate is inadequate and will just lengthen the time for you to reach your personal financial goals. Personally, I keep 50% to at most 80% of my monthly earnings and use the lump sum I accumulate to help my parents, pay our mortgage back home, and to strengthen my long-term savings.

Let us all remember the purpose of this activity: We are doing this proper allocation of finances not to restrain the joy and freedom that we experience in our lives but to have a happy, enjoyable life while accumulating enough funds so we can be more prepared for any upcoming ordeals and be able to retire much younger, regardless if we work or not.
I have yet to meet a happy and contented person who is one pay slip away from financial disaster and who is not deep in consumer debt and house mortgage payments.

Decide today what your (and your family’s) future will be.

Be financially independent.