Tuesday, December 09, 2008

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 !


Anonymous said...

MUSIC, surprising you have missed important items setting aside money for investment.. not to mention eductation and for life exploring other parts of the world...:)

Dancerene said...

Coincidentally, I've just done up mine. Here goes...

Profile: Single, female, staying with parents

Monthly Budget Items

Disposable income: take home salary

Daily expenses (meals & out-of-pocket expenses)
- offset items (eg. claims from office)
Transportation (ez-link card top-up)
Handphone bill
Credit card bill (grocery, leisure, skincare, etc.)
Insurance premium
Income tax (through monthly GIRO deduction)
Transfer to joint-account (for marriage)

Additional items for annual budget:

13th-month bonus
Interest (estimated 0.75%)
Dividends (4% of equity investments cost; think I am quite aggressive here. Will review)
Misc (eg. ang baos from new year / birthday) =P

Parents' allowance
Courses (personal interest/self-improvement)
Overseas trip

Annual net surplus (target: 25-30% of annual net income) will be transferred to investment account.

Ricky said...

Wow. 25-23% of annual net income is a lot, i probably can only save 20% if i tighten my belt. (Nowadays, i don't need to wear belts cos getting fat liao. Need to upgrade pants' size soon hehe)

Market Uncle said...

I had mine too:

Monthly income for personal expense and savings. 13th month bonus for 'one off expenses, insurance etc"

All bonuses (excl. 13mth) + all dividend == "privilege, not entitlement", so allocate all for investment :)

a bit heong though... :)

ucypmas said...

While having a budget is nice, I think of more use would be the willingness in investing time to document your financial position every month.

It can be done at a high level, or at greater detail depending on the individual's preference.

The process should tell you based on the income that you have and the final bank balance, where the money have gone to and how you have spent it.

It will also be able to tell you for months in advance how spending a an extra 1-2k this (or in some future month) will impact your cash availability down the road.

musicwhiz said...

Hi Anonymous,

Nope I did not miss those out. Money for investment will come from regular savings from my income. As for education, I think I am more or less finished with it and am happy to be a working adult. Books are considered a discretionary expense.


musicwhiz said...

Hi Dancerene,

Thanks for your long and detailed list ! I guess a lot of the daily expenses can't be really estimated, or else it would get rather tedious. For recurring expenses it gets much easier.

I think a 4% dividend yield is a pretty decent expectation, but of course for 2009 it may be a little optimistic. My personal dividend yield for 2008 is about 4.8% on my entire portfolio cost.

Haha I had not factored in overseas trips as they are quite a large expense and are not really a "necessity" per se. I'll just have to see if I have enough for a quick nearby trip.

As for surplus, I will continue saving 50% of my net take-home pay into my investment account, as well as reinvesting dividends that come in.

Thanks again,


musicwhiz said...

Hi Ricky,

I think it's possible. I manage to save about 45-50% of my net income every month, unless I have expenses like taxes or insurance premiums. I think it's possible if we adjust our lifestyle to exclude a lot of "wants", yet enjoying the simple things in life like walks and being together with loved ones.


musicwhiz said...

Hi Market Uncle,

haha yea good point, bonuses are to pay off those one-off items like taxes and insurance premiums. Otherwise, normal salary will be saved for investment in equities.


musicwhiz said...

Hi ucypmas

Great point ! Yes I do a cash flow summary every month for myself as well as a credit card spending tracking to review how much I spent per month. Since I always pay myself first, there is no danger of over-spending as I have to make do with whatever funds are in my spending account.

As it is, I do ensure I have at least 6-9 months cash for use for emergencies and contingencies.

Thanks !


PanzerGrenadier said...

Hi Musicwhiz

Timely post to remind us to plan ahead. :-)

Just a couple of additional things to consider in budgeting:

1) Budget for PRIORITY items first
- i.e. your monthly loan instalment if you are paying your housing loan
- Whilst most people use CPF only, there is always a risk that Gahmen will cut CPF employers' contributions as they did during the Asian crisis. So budget some take-home cash flows in case CPF is cut
- You can eat bread, stop shopping or don't bathe to save money. But you can't stop paying HDB/bank unless you want them to foreclose your property

2) Income Tax filing (for individual taxpayers) deadline is 15 April of each year
- Can use IRAS website to estimate your tax payable since before then you would have your IR8 available and know your tax liability

3) Also budget a bit of money to enjoy life :-)
- Someone I know just passed away in his late 40s. Collapsed of heart attack and gone after 3 weeks in ICU.
- Live life (a little), because life can be unpredictable

Have a great 2008 and fabulous 2009!

Ricky said...

Hi MW,

I've already left out discretionary items. Breakdown is as follows:

Tithe 10%
Parents 17.6%
Insurance 6.7%
Household bills 10%
Food 5.9% ($10 for 20 weekdays)
Transport 4.7%
CPF 18%
Hp bill 1.2%
misc ??? (weddings, baby showers etc)

Total expenditure 74.1% (min)
Savings 25.9% (max)

Gonna save whatever bonuses i get and hopefully go for Israel trip next yr end :)

Always must remind myself that money can earn back but time once passed can never be earned back.

Merry Christmas in advance everybody!

patrol said...

As for insurance, some prefer to pay month by month, just in case if the unfortunate happens, you will not be required to pay anymore premiums. Although paying annual premiums still has an advantage in terms of the slight discount.

Anonymous said...

Is there a way to pay less income tax?

Profile: Married, not staying with parents, both couples working

musicwhiz said...

Hi Panzer,

Thanks ! Disciplined list haha, and a good addition to what I've typed, which is rather rudimentary. I definitely agree with the "enjoy yourself a little" part, because life is short and inherently unpredictable, so we should enjoy while we can, as long as we do not fall into financial abyss !


musicwhiz said...

Hi Ricky,

Yep I agree that vacations are important and allow you to see the world. They also cannot be enjoyed the same way when one is older as you may not be as mobile as when you are in your 20's and 30's. That's one thing I should prioritize myself !

I'm thinking of either New Zealand, Taiwan or Korea perhaps !


musicwhiz said...

Hi Patrol,

Yeah I think you've raised a good point. However, I see insurance as more of an assurance and so I prefer to pay annually. Though as you say it something were to happen we would "lose" the additional months premium, though when it comes to that, I don't think family members would care too much about those few months. (Touch wood !)


musicwhiz said...

Hi Anonymous,

Not that I know of. There is not much you can use to deduct against chargeable income unless you donate to recognized organizations. Then you can use the amount for double deductions. Otherwise, voluntary contributions to CPF also can be used to offset taxable income. These are some of the methods I know of (but do not use).


Alisa said...

I don't like budgets! But, they are important to have to track expenses and to stay on track for reaching important financial goals. I've used quicken in the past and I think it is very easy to use and each new update usually brings some really cool features!

Be well.

Anonymous said...

pay less... pay your parents into their cpf retirement account.. then pay your retirement into the supplementary retirement account. then donate to your favorite charity. if you are married and young have a baby and you can skip paying tax a few year..

musicwhiz said...

Hi Alisa,

Personally, I think budgets can be a pain to do, especially in terms of the forecasting. But I treat it as a necessary evil, as it would help one to focus better for the new year, assuming you stick to it !

Quicken, I've heard, is pretty good. But so far I've stuck to good ol' Excel which has been more than sufficient for now.


musicwhiz said...

Hi Anonymous,

Yes those are good suggestions indeed for reducing one's income tax liability ! Thanks !