How to Begin Budgeting for Investing

Getting started with budgeting for investing can feel daunting, particularly if you’re new to the investment landscape. Simultaneously managing budgets for essential expenses and leisure activities can also be a challenge. Fortunately, there is a popular budgeting method called the 70:20:10 rule that has gained recognition for its simplicity and effectiveness. In this guide, we’ll delve deeper into how this rule works and how it can help you achieve your financial goals.

The 70:20:10 Rule

The 70:20:10 rule involves allocating percentages of your income into three distinct categories. Here’s the breakdown:

1. Essentials (70%): The largest portion, 70% of your income, is allocated towards covering your living expenses. This includes payments for rent, utilities, groceries, transportation, and other necessary costs.
2. Debt Repayment/Savings (20%): Allocate 20% of your income towards either repaying any outstanding debts or building up your savings. If you are debt-free, this portion can be directed entirely towards savings to help you reach your financial goals.
3. Fun Bucket (10%): The remaining 10% is designated as your “fun bucket” or discretionary spending. This money is set aside for non-essential activities and things you enjoy, such as entertainment, dining out, hobbies, or vacations.

By splitting your income into these predetermined categories, you gain better control over your daily spending, can stay on top of debt repayments, and create a solid foundation for saving.

Utilizing the Bucketing Technique

Bucketing, another budgeting technique, can complement the 70:20:10 rule by physically separating your funds into different accounts with specific purposes. Many banks offer easy online access to view balances and transaction history, making it convenient to implement bucketing using your existing bank accounts. To get started with bucketing:

1. Choose Your Bank and Set Up Buckets: Select a bank that suits your needs and create separate accounts or sub-accounts for each category—essentials, debt/savings, and fun.
2. Automate Regular Transfers: Establish recurring transfers from your income account to regularly allocate funds to each bucket. Set up these transfers through your online banking platform. By automating this process, you reduce the risk of forgetting to allocate money manually with each pay cycle.
3. Ensure Early Allocation: By moving the money into your buckets before you have a chance to access it, you prioritize your budgeting goals and prevent impulsive spending.

By combining the 70:20:10 rule with the bucketing technique, you gain greater financial control, monitor overspending, and work towards achieving your short and long-term financial objectives.

In this guide, we present a three-step checklist to help you get started:

Step 1: Establish Clear and SMART Financial Goals

Every investor has unique motivations for investing. Have you considered why you want to invest? Is it to accumulate enough funds for purchasing property, or perhaps to secure a comfortable retirement? The reasons for investing are as diverse as the available investment options.

To begin, it’s essential to define specific goals using the SMART criteria:

1. Make your goal Specific: Clearly state your objective, such as “I want to save enough money for a down payment on a condo in Bukit Timah.”
2. Ensure your goal is Measurable: Specify a target amount, such as “I want to save $150,000 for a down payment on a condo in Bukit Timah”
3. Ensure your goal is Achievable: Set realistic expectations and determine the steps required to reach your target, such as “I will save $150,000 for a down payment on an apartment in my city by investing in large-cap stocks from Tesla.”
4. Make your goal Relevant: Understand the significance of your goal, such as “I want to save $150,000 for a down payment on a condo in Bukit Timah by investing in large-cap stocks from Tesla so I can start my own cafe business.”
5. Make your goal Time-based: Establish a deadline to stay accountable, such as “I want to save $150,000 by 2030 for a down payment on an apartment in Bukit Timah by investing in large-cap stocks from Tesla so I can start my own cafe business..”

Step 2: Educate Yourself About Investing

Once you have formulated your SMART investment goal, it’s crucial to enhance your understanding of the various investment options available to you. Familiarize yourself with asset types such as stocks, fractional shares, bonds, and ETFs. Learn about concepts like compound interest and the importance of portfolio diversification. If you prefer a more hands-off approach to investing, look at the different Robo-Advisors available in Singapore or consider investing in ILPs and getting a knowledgeable financial advisor.

Step 3: Explore Different Investment Approaches

Different investment approaches suit different individuals, so it’s vital to evaluate which investment vehicles align with your goals and are suitable for your SMART plan. Consider the following factors while making your assessments:

1. Account for Costs: Remember to include fees for account setup, stock depositories, trading, and transactions when budgeting for investments.
2. Assess Risk Profile: Know your personal risk tolerance and be comfortable with the potential risks associated with your chosen investments. Typically, higher-risk investments offer the potential for higher returns, while lower-risk investments provide more stability.
3. Consider Interest Rates and Compound Interest: Take into account the impact of interest rates and the power of compounding on your investments.
4. Anticipate Personal Changes: If you expect significant changes in your circumstances, such as relocation or job transitions, evaluate how they may affect your financial situation and adjust your budget accordingly.

By following these three steps, you can lay a solid foundation for budgeting and initiating your investment journey. Remember, investing is a long-term endeavor, so maintain discipline and periodically review and adjust your budget as needed. Remember, consistency and discipline are key. Regularly review your budget, adjust as needed, and stay committed to your financial goals for a successful budgeting journey.