Personal Finance Part 10 - Creating a Personal Budget for 2009
As the year-end approaches and a new year beckons, it's time for the common man on the street (i.e. you and me) to plan and budget for the new year and the challenges it may bring. Next year is particularly important for this budgeting exercise as it has been widely tipped to be a "recession year" in which growth will slow across all sectors. This makes one's job more vulnerable than ever as well as one's income stream too, which may be subject to (touch wood !) pay cuts or pay freezes. Already, many firms in Singapore are retrenching (mainly banks) or cutting pay (e.g. SPH) and many more will probably do so in the first half of 2009.
So what exactly goes into a Budget ? One can do a detailed spreadsheet for this or one may just keep a rough hand-written guide; but it must consist of your probable cash inflows (through salaries and/or bonuses and expected dividends) as well as your major expenses. At this point, I would like to remind readers of several "one-off" expenses which are payable for the year. This may or may not be applicable to you, depending on your financial circumstances:-
1) Property Tax - Usually a notice is sent in December or January the next year, and IRAS will assess the property tax payable based on the Annual Value of your house. Incidentally, for 2008 and 2009 the Government has granted a S$100 tax rebate for most HDB flats, to be offset against their property tax bill. The (apparent) joke is that the Annual Value of most HDB flats has been raised since 2008, so the effects of this rebate are hardly felt at all !
2) Income Taxes - Usually arrives around the middle of the year, but the deadline for submission is April 30, 2009 which is the close of the government's financial year-end. Remember to set aside some cash to pay for income taxes, and if you had donated money to charities in the last year, you can claim double deduction for the donations.
3) Subscriptions - Most subscriptions are renewable after 12 months, which means one has to be prepared to cough up a lump sum payment to maintain any subscriptions they have, be they magazine ones, or club memberships.
4) Insurance Premiums (Annual) - If you were in my situation, you would have to make a lump sum insurance premium payment for annual coverage. I prefer this to monthly premium payments because annual premiums tend to give you a slight discount, and it also ensures you don't have regular cash outflows throughout the year. So you justhave to set aside cash for that one lump sum payment and forget about it till next year, while enjoying coverage all the way.
5) Discretionary Items - This of course varies from person to person, but will include items which form part of capex such as a new wardrobe, fridge or perhaps (if a new baby is coming) new clothes and a crib/stroller. Each person has their own priorities and items to buy for the new year, so make sure you set aside the cash for that extra something.
Once the Budget is essentially complete, it should be able to tell you if you have surplus funds to last you through the year. Remember to set aside about 6-9 months of cash for emergency or contingency expenses (those things we wished never happened though there is always a remote possibility).
One should note that every month, there should be positive cash flow arising from the Budget. This ensures that some of your income is put aside as savings every month BEFORE it is spent, as I strongly believe in "paying yourself first". For lump sum payments, ensure that the cash set aside is really used for that purpose and not for some other sudden indulgence or impulse purchase, as this may derail your plans for retirement savings and building your nest egg. Since dividends are an uncertain portion of my cash inflows, I usually do not budget for them or else just use a more conservative number (e.g. instead of assuming 3 cents per share which may have been the historical payout rate, I will use 1 cent per share instead). It's always better to budget less money coming in than more, as it will ensure you tighten your belt further. If more money happens to flow in, then all the better as you would end up with "extra" savings.
Perhaps readers can share their experiences in creating and following through a budget which they have prepared, and what goes into it. This would make a more interesting and dynamic discussion rather than me just listing generic items which goes into everyone's Budget.
Wishing everyone a Happy New Year in advance ! And may all your companies do well and may your dividends continue to flow in !