3 Simple Steps to Start Saving 20% Of Your Income

On a daily basis we hear from our readers and users about how they need to get more loans
because their income is insufficient for them to survive after repaying all their existing debts. It
is also not unheard of for Malaysians who are just clueless as to what happened to their salary by
the second week of the month. These stories, though heart-wrenching, can be frustrating to hear.
Our last year found that the biggest concern most Malaysians have when it comes to their
finances is the high cost of living. But if I may be brutally honest, I believe the biggest problem
we have is the lack of financial planning. I mean, sure, cost of living has skyrocketed and income
is trying to catch up, albeit in snail-pace. But I the disparity between income and cost of living is
not that great that it is impossible to survive. Perhaps, we should do some self-reflection and look
at our finances to figure out how we can cut and trim to match our current cost of living. We
can’t have it all – buying our first home and shopping every weekend, something’s got to give.
So, how do you do it? What can you sacrifice and what do you spend on? Here I break down
budgeting in the easiest way for you, and show you how you can benefit from it:

The 50/30/20 budgeting method

We can’t say it enough times: Don’t spend more than what you earn! And the best way to do that
is to keep track of what you spend. One simple way of keeping track of your money is through
percentage budgeting. It is a simple and straightforward concept – instead of allocating fixed
amount to every line item, you establish a target percentage for each expense category. One
guideline that we like to use for percentage budgeting is the 50/30/20.Here’s the breakdown:
[table id=741 /]

1. Fixed costs – 50%

Fixed costs mostly consist of essential expenses, and it makes up half of your income. For an
average 20-something, fixed expenses are usually made up of rent (if one is not staying with
his/her parents), phone bill, Internet subscription, car loan (if one owns a car), monthly parking
at work, insurance premium and more. [Table id=742 /] However, if you’ve listed down all your
fixed costs and they come up to more than 50%, it’s time to take a hard look at your expenses.
Perhaps you can downgrade your phone or Internet subscription, or even sell your car and turn to
public transportation. The beauty of a budget is, you will immediately identify where the
problem areas are and you can make adjustments in your finances.

2. Flexible spending – 30%

Allocate no more than 30% of your take-home pay toward flexible spending. These are day-to-
day expenses that can vary from month to month, like eating out, groceries, shopping, hobbies,
entertainment, or petrol. To determine your flex-spending amount, first deduct your fixed costs
and financial goal contributions from your income. This way, you’ll know that the balance for
flexible spending is truly yours to spend however you want. [Table id=743 /] Flexible spending
will require you to exercise discipline in order to be on track. If you have splurged on a nice
dinner with your friends, then you will need to cut your spending elsewhere. Perhaps, by
preparing your own lunch for the next few days, or forego paid entertainment for the month. The
key here is to ensure the overall spending allocated for flex-spending does not exceed 30% of
your net income.

3. Financial goals – 20%

Not sure what your financial goals are? Ask yourself what do you want in five, 10, 20, and 30
years down the line? How do you envision your retirement? Financial goals are not set in stone,
and should be reviewed every few years. However, having a rough goal will help you work
towards achieving them. If you allocate 20% of your income for your goals, you will ensure that
your finances will be on track to reach your target. Assuming you start with RM3, 500 net
income per month, and on average you get a 5% salary increment every year. Here’s how 20% of
your net income makes a difference: [table id=744 /] though this budgeting method sounds
simple enough, it takes some discipline to stick to it. And it does not work like a miracle where
your finances will improve and your debts will disappear overnight. You still need to work hard
to make a sustainable impact on your finances. The most important thing about budgeting is, it
should be personalised to your lifestyle and spending habits. This budgeting rule serves as a
guideline to lead you towards the right direction. Once you have an idea on how a balanced
budget looks like, you can create your own budget to achieve your financial goals.