To effectively manage your finances, budgeting is a crucial skill to master. It helps you allocate your income and expenses in a sensible and scientific manner. Let’s explore an effective budgeting plan for those with low incomes.
1Expense Allocation
Allocating your expenses allows you to gain a clear understanding of your cash flow and spending habits, helping you identify unnecessary expenses and create a financial plan for the future.
Based on your monthly expenses, you can divide your income into different categories of spending.
Create a comprehensive plan, evaluate it, and stick to it to avoid overspending. This will help you avoid financial troubles and improve your financial situation. Here are some monthly expense allocation methods for you:
The 60/10/10/10/10 Method
Rationalize your expenses
This method involves dividing your income into different spending categories with specific ratios:
– 60% for essentials: Housing, food, transportation, utility bills, etc.
– 10% for long-term savings.
– 10% for unexpected expenses: Illness, car repairs, unemployment, etc.
– 10% for entertainment: Shopping, movies, etc.
– 10% for retirement planning.
If your financial situation is not favorable and you have existing debts, prioritize debt repayment to achieve financial freedom sooner. Allocate 10% for retirement to pay off your debts. Then, tighten your spending and only spend when necessary or when your income increases.
Once you’ve cleared your debts, start building your retirement savings.
The 20/80 Method
The 20/80 method is a simple budgeting approach. It involves dividing your income into two parts with the following ratios:
– 20% of income for investment or savings. This is considered a “frozen” fund, meant only for future investment and savings, not for daily personal needs.
– 80% for daily living expenses.
However, this method is most effective when you’ve cleared all your personal and bank debts. If you still have debts, the 20% savings ratio may not be realistic or sustainable.
If your income is not high enough, and 80% of it cannot cover your daily expenses, you can adjust the savings percentage. A more reasonable range would be 10-15%.
The 20/80 Rule
For example, with a monthly income of 6,000,000 VND and existing debts, you can allocate your expenses into three parts: 10% (600,000 VND) for savings; another 10% (600,000 VND) for debt repayment or emergency fund; and the remaining 80% (4,800,000 VND) for personal expenses, as follows:
– Housing: 800,000 VND
– Food: 2,000,000 VND
– Transportation: 400,000 VND
– Utilities: 200,000 VND
– Health: 200,000 VND
– Shopping: 800,000 VND
– Social Events, Funerals, Birthdays: 400,000 VND
The “Halves” Method
Similar to the 20/80 method, this approach also divides your monthly income into two parts, but without specifying ratios for each spending category. Instead, the allocation depends on your needs, which may vary from month to month. The two parts are:
– Part 1: Daily expenses.
– Part 2: Savings, emergency funds, etc.
For instance, with a monthly income of 6,000,000 VND, you can allocate 75% (4,500,000 VND) for daily expenses and 25% (1,500,000 VND) for savings and emergency funds. Within the daily expenses category, further classify your spending into essential and non-essential expenses:
Essential Expenses:
– Rent: 800,000 VND
– Food: 2,000,000 VND
– Transportation: 500,000 VND
– Utilities: 200,000 VND
– Sports: 300,000 VND
– Family: 700,000 VND
Non-Essential Expenses:
– Shopping: 700,000 VND
– Social Events, Funerals, Dating: 400,000 VND
– Entertainment: 200,000 VND
– Miscellaneous: 200,000 VND
2Spending by Priority
Establish your spending priorities
Prioritize essential expenses that you’ve listed for the month. These are mandatory payments that, if not made, could lead to various issues. Examples include:
– Rent
– Food
– Transportation
– Utilities
– Health
– Education
Make a detailed list of these expenses and set aside a portion of your income according to your budget. The remaining money can be used for non-essential expenses and savings.
However, it’s important to set a maximum limit for non-essential spending to prevent overspending and ensure you’re still saving.
3Regularly Update Your Expenses
Most people tend to overlook the importance of regularly updating and recording their expenses due to laziness or a lack of awareness.
Regularly record your expenses
If you don’t develop the habit of recording all your expenses, your financial plan will be challenging to execute.
In reality, there are times when you spend impulsively and later forget about those expenses, only to panic when your funds are almost depleted.
Therefore, it’s crucial to cultivate the habit of recording and updating your income and expenses, no matter how small, to stay true to your financial plan.
Many people tend to overlook minor expenses, but remember that “small leaks sink great ships.” Each small expense, if not controlled, can lead to significant wasteful spending, impacting your budget.
4Develop a Cash Habit
Develop a cash habit
Nowadays, due to convenience, many people prefer to pay with cards or mobile apps instead of cash. However, it’s more challenging to keep track of your spending when using cards because you may not realize how much you’ve spent.
Paying with cash makes it easier to be mindful of your spending habits and the amount you’re spending. Therefore, developing a cash habit can be beneficial for managing and tightening your budget.
5Face Your Debts
Debts are a reason why you can’t save money
Without a clear spending plan, you can’t control your income and expenses, which can lead to debt.
When you don’t manage your finances well, it’s easy to fall into the trap of borrowing money from friends, colleagues, or family to fund unnecessary personal expenses like shopping, travel, or entertainment.
Gradually, this becomes a habit, and your income will be used irrationally due to this bad habit.
6Establish an Emergency Fund
To effectively manage your monthly budget, consider setting up an emergency fund. Note that an emergency fund is different from a savings fund.
A savings fund is for future investments like travel, buying a car or a house, starting a family, etc. On the other hand, an emergency fund is for unexpected life events like illness, accidents, car repairs, unemployment, etc.
Establish an emergency fund to manage your finances
When creating your monthly budget, set aside a portion of your income for an emergency fund. The percentage allocated to this fund can vary depending on your monthly income, ranging from 5% to 10% or more.
You can keep your emergency fund in a bank account, preferably a non-term deposit. Since this fund is for unexpected events, if you put it in a term deposit, you may hesitate to withdraw it when needed, which could lead to additional borrowing.
7Utilize Financial Management Tools
Instead of manually recording your income and expenses on paper, consider using financial management tools for more convenience and speed.
Each time you spend money, simply input the amount into the app, and it will calculate your balance and expenses, even providing spending charts. This will help you evaluate if your spending is reasonable.
Financial management tools
There are numerous financial management apps available, such as Money Lover, Sổ thu chi Misa, Mint, and HomeBudget.
Each app has unique features and interfaces, but they all aim to help you better manage and control your personal finances. Depending on your needs and goals, choose the app that suits you best.
Check out some recommended financial management apps below to find the one that aligns with your needs!
Frequently asked questions
Budgeting is crucial as it helps you understand your cash flow and spending habits. It allows you to allocate your income sensibly, covering essentials while also planning for the future. By creating and sticking to a budget, you can avoid financial troubles and improve your overall financial situation.
This method involves dividing your income into five categories with specific ratios. 60% is allocated for essentials such as housing, food, transportation, and utility bills. 10% each is set aside for long-term savings, unexpected expenses, entertainment, and retirement planning. If you have existing debts, it’s recommended to prioritize debt repayment within the retirement category.
The 20/80 method is a simple approach where 20% of your income is saved or invested, while 80% is used for daily living expenses. This method is most effective once personal and bank debts are cleared. If you have existing debts, a lower savings percentage, such as 10-15%, may be more realistic.
This method involves dividing your monthly income into two parts without specifying ratios. Part 1 covers daily expenses, and Part 2 is for savings and emergency funds. You can further classify daily expenses into essential and non-essential categories to gain more control over your spending.
Start by listing essential expenses such as rent, food, transportation, utilities, health, and education. Allocate a portion of your income to cover these mandatory payments. Then, set a maximum limit for non-essential spending to prevent overspending and ensure you’re saving consistently.
Regularly recording your expenses is crucial to staying on track with your financial plan. It helps you avoid impulsive spending and keeps you mindful of your budget. Small expenses can add up, so it’s important to track them to prevent wasteful spending and maintain your budget.
Using cash instead of cards or mobile payments makes it easier to be mindful of your spending habits. It helps you stay within your budget and tighten your spending when necessary. While digital payments are convenient, they can make it harder to track your expenses and may lead to overspending.
Without a clear spending plan, it’s easy to fall into debt. Poor financial management can lead to borrowing money for unnecessary personal expenses. This becomes a habit, and soon your income is used irrationally. It’s important to face your debts and prioritize repayment to achieve financial freedom.
An emergency fund is crucial for effective financial management. It’s different from a savings fund, which is for future investments. An emergency fund covers unexpected life events like illness, accidents, car repairs, or unemployment. Aim to set aside 5-10% or more of your monthly income for this fund, keeping it in a non-term deposit account for easy access.
Financial management tools, such as Money Lover, Sổ thu chi Misa, Mint, and HomeBudget, offer convenience and speed. These apps allow you to input expenses, calculate balances, and track your spending habits. They provide spending charts and help you evaluate if your spending is reasonable, ensuring you stay on track with your financial goals.
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