Budgeting 102

Disclaimer: this is what I would consider to be level 2 budgeting. And the only way you can get to level 2 is by mastering level 1. What does mastering level 1 mean? It means that you are automatically thinking about how much you have spent and how much you have left for the day / week / month. It means that you know how much your daily lifestyle costs and it also means you have experienced what it means to live on the bare minimum for a few weeks.

The reason I call this level 2 budgeting is because once you have a constant pulse on your everyday spending, there’s no need to actually go through the process of tracking your expenses anymore.

Instead, you’re now ready to move onto the bucket method. And if you’re not sure what that means, we have a free program called Money 101 that will teach you that and a lot more, which are all the foundations of what’s needed to move onto level 2 budgeting.

From a bird’s eye view, level 2 budgeting works like this:

Step 1: Decide on your buckets

The buckets are meant to be a way of thinking of how to categorise your different types of spending.

For me, the buckets are: set expenses, daily expenses, 12 month goal, long term goals, and income accelerators.

For those who have gone through Moeny 101, you may have noticed that play is no longer a bucket. Instead, it is now a part of the daily expenses. Because we know what are set expenses that will need to be paid regardless, we can easily put everything else with the play money so we don't have to do as much guessing.

Step 2: Allocate your budget for each bucket

Once you have your main buckets, you allocate your monthly take home pay to those buckets.

Once again, for me, let’s assume my take home pay is 5000. I will then allocate this money like this:

• Set expenses: 1000 – this consists of rent, utilities, broadband and phone internet
• Daily expenses: 1500 – or approximately RM50 a day
• 12 month goals: 1000 – for the past 2 years, my 12 month goal is travel
• Long term goals: 1000 – this gets saved up and invested as I see opportunities
• Income accelerator: 500 – the first few years this was focused on growing my professional skills. Now it’s used to grow my side project that I plan on growing to be able to pay me more than my work income.

Step 3: Evaluate how you did

Were there any unexpected events that happened over the course of the month that caused one of your buckets to run out? Or do you have a huge surplus in another bucket? Were there better ways to spend your money, or are you happy with how it came out?

If you look closely, you will notice that there are really only 2 things that really require checking up on. The main one would be your daily expenses. Did you spend more than what you expected? Or did you spend less? If you spent more, that means next month’s daily expenses will become lower. (And you will also need to come up with a plan to make sure you don’t overspend). If it’s less, that money can now go to whatever bucket you choose.

The other bucket isn’t as obvious (unless you’ve been following us for awhile now). The bucket is your income accelerator bucket. The goal with this bucket isn’t to spend much less than budgeted, but it’s to hit that budget as close as possible. Because when you hit that budget, it means that you’re growing professionally, which means you’re well on your way to command a higher salary.

Of course, if there’s some program that you want that will take some time to save up and get, then by all means, save that money up.

Using this in real life

This was the method we used to make our 5 week New Zealand trip possible. By budgeting the trip to cost 8000, we knew that it would take at most 8 months to make happen. But because we knew that we'd be gone for 5 weeks, that means I have at least 1 month’s worth of daily expenses that won’t exist, meaning that I now only have to save up 8000 – 1500 = 5500.

Conclusion

Level 2 budgeting can quickly give you a pulse of your financial situation, but it requires you to master level 1 budgeting first. Once you’re at level 2, you can create your own buckets that are important and can quickly project how long it would take you to reach your goals.

How do you see yourself using this concept? Can you think of any other ways to improve it? Or are do you think you’re still a little weak on level 1? Let us know in the facebook group!