In my previous entry, I’ve analysed my financials over a 6 months period from July to December 2017. Click here to read the analysis if you haven’t. In that entry, I disclosed my maximum budget of RM1,300 for monthly expenses which includes food, groceries, fuel, car maintenance and the occasional splurge. So, how do I come up with this value?
Understanding your spending habit and knowing where each and every sen of your money went into is the key to budgeting. By tracking my monthly expenses, I have a clear picture of where my money goes. I used Wallet apps to track my expenses. To be honest, I was quite surprised to find out that 25% of my expenses went into my car! A small amount of money that you spend today will definitely adds-up and impact your finances in the long-run. Nevertheless, if you know where your money goes, you can then plan your budget around it.
Before that, a little backstory…
In my early months of working, my monthly budgeting strategy was fairly simple and would go about something like this:
- Receive money in my bank account.
- Withdrew money from the said bank account whenever I’ve run out of cash.
- Decide on whether I can afford to make a purchase solely by mental calculation of my current spending level. (current spending level = current bank balance – last month’s bank balance, quick math). Positive means I can buy the item and negative means I can’t.
- Whatever amount left in the bank at the end of the month, would be my saving. If my current balance is more than the last month’s balance, I would consider myself succeed in saving money.
- Repeat step 1-4 for each month.
An oversimplification, but that’s how it generally goes. There’s nothing wrong with this strategy as long as I keep my bank’s balance more than last month’s balance right? Well yes, it’s not wrong but it’s not smart either. How do I know I can afford if there’s an emergency happen? How much fancy dinner can I afford to have each month? Well, from that moment on, I knew I had to have a better budgeting system.
So what is my money budgeting strategy now?
For close to 8 months now, I am using a method which I would like to call the “Bucket Budgeting Strategy”, which is inspired by Scott Pape, the writer of “The Barefoot Investor“. Scott Pape is an Australian who shares financial tips and tricks through his website and books. One of his notable financial books is “The Barefoot Investor“, which discussed on how to gain control on your finances and set your life for retirement. The book shares a lot of technical information as well as motivational. Overall, it was a great read. As Scott is an Australian, lots of the content discussed on Australian financial systems and banks but there are still a lot of valuable information that we can learn and adapt from it. If you do decide to read the book, just take note that whenever he mentions Super, it refers to Superannuation which is the Australian fancier way of saying pension fund, sort of.
Disclaimer: No, I was not paid to advertise the book.
With that out of the way, let’s get into the main subject…
Mat Kewangan’s Bucket Budgeting Strategy
The picture above sums the whole idea: A water tap, and three buckets. The water tap represents your income, whatever the amount is minus your EPF contribution and other taxes. It IS your net income. Below the water tap is three buckets: Blow, Mojo and Grow which is an isolated fund that you put away for a specific aim. I would now go into details on the meaning of these buckets.
Bucket 1: Blow (60%)
As the name implies, this is the bucket which you put your money solely for your monthly expenditure. Bills, food, drinks, fuels, groceries and Touch n Go are all should go into this bucket. I suggest around 60% of your net income to go into your Blow bucket.
Where should you keep this money? At your primary bank account. (bank account which you receive your monthly salary i.e CIMB, Maybank, Islamic Bank, etc.)
You can further divide the money in the Blow bucket into 3 more categories: Splurge, Smile and Fire Extinguisher with 10%-10%-20% weightings for each category. The percentage is taken from the total 60% of your net income. For example, if your net income is RM2,500, you will put RM1,500 (60%) in the Blow bucket and the 10%-10%-20% is taken from the RM1,500, not the RM2,500. Meaning RM150 for Splurge, RM150 for Smile and RM300 for Fire Extinguisher. The percentage here is totally adjustable to your level of comfort.
Splurge is the money which you reserve to spend on the stuff that you enjoy and make you happy. It can be anything. Fancy dinner out, ice creams, new clothes, going out for movies, sports activities, anything as long as they are within the budget.
Suggested percentage: 10% out of the 60% from the Blow bucket.
Where to keep this money? I suggest keeping this money in a separate account as there is a risk that you might overspend and use the money that you originally allocate for your fuels and bills instead. A secondary account in your primary bank will do. A secondary account in the same primary bank is essential so that you won’t be charged for the transfer fee between your two accounts. Below is an example of different basic accounts that are offered by CIMB bank. I have an old CIMB “SA Passbook” account and I chose the Basic Savings 1 as my Splurge. Free annual fee and the option to have ATM or debit card is the criteria that you should look for.
Extra: Apply for an ATM or debit card for Splurge account and label them as “Splurge”. You go on an all-out shopping spree using this card because it is after all, for you to splurge on.
Fire Extinguisher is the money which you reserve to put out your financial fires if there’s any. In short, they are your funds for the short-term emergency. Replacing your car tires, buying medication for your flu, or that unexpected trip that you need to do take to visit friends or family members in the hospital. Buying a newly-released limited edition Adidas Ultra Boost is NOT an emergency.
Having a set of money that you put aside for emergency will ensure you a peace of mind whenever you are in a bind. You won’t feel as guilty or as bad to spend this money when the time comes. True story: My car’s alternator belt suddenly snapped in a middle of a traffic jam. Somehow, I managed to glide the car to safety. Although the overall situation sucked, financially I was not as stressed because I knew I HAD already prepared the money to cover the cost of fixing the car.
Suggested percentage: 20% out of the 60%.
Where to keep this money? You need to have a quick access to this money in case of an emergency. So, keeping the money in your main primary bank account is a good way to do it.
Extra: If there is no emergency happened in a particular month, you can transfer a small percentage of the Fire Extinguisher money to Smile.
In a way, Smile is almost the same as Splurge, except they are long-term goals rather than short-term pleasures. Think of an expensive watch that you always wanted to buy, a much-needed getaway vacation on an island, or anything that makes you smile when you are talking or dreaming about it. For me, it will be a budget backpacking/hiking trip to Kathmandu. It will surely take some months for me to save, but at least I’m 10% closer to my goals each month!
Suggested percentage: 10% out of the 60%
Where to keep this money? For me, I kept my Smile money in a different bank account than my primary bank, just to keep everything separated. I transferred out this money out of my primary bank account once in 3 months to reduce the transfer fee.
All in all, I put 60% of my net income into the BLOW bucket, which is further divided into three categories: Splurge, Fire Extinguisher and Smile:
Bucket 2: Mojo (20%)
As the name implies, this is the bucket which you put your money in order to get back your Mojo (read: swag). For example, you lose your day job or worse, you are hospitalised due to some illness or accident. Mojo will be the money that you use in order to survive within that period of your unemployment or hospitalisation. In short, this money is your medium-term emergency funds. Suggested percentage to put in this bucket is 20% of your net income and for a starter, you should target to have around 3-month worth of your monthly expenses in this bucket.
For example, as per my analysis in the previous entry, my average expenses per month is RM1,041.98 or approximately around RM1,100. So, I should set to have about RM3,300 in this bucket (RM1,100 x 3). If you reach your 3-month worth of expenses, the next target would be to have 6-month worth of expenses (RM6,600) and then 12-month (RM13,200) worth of expenses. This could take a little bit of time in order to fill your Mojo bucket, but having a full Mojo bucket will guarantee you some flexibility in your life should you think of switching your career or to transition doing business full-time. Having a 12-month buffer in your Mojo bucket means that in the worst possible case, you can afford to be unemployed for one-year and still being able to carry on with your daily life, unaffected.
You need this money in the time of emergency but they are usually not immediate meaning, you can keep your Mojo money somewhere that is easy enough to liquidate while also able to maintain its value in the long-term. Tabung Haji would fit these criteria as you can withdraw money quickly (online transfer or Tabung Haji linked ATM such as Maybank or Islamic Bank) as well as giving you some dividend. Should anyone want a different choice, a high-interest savings account will also work. My Mojo bucket of choice is the Tabung Haji.
Bucket 3: Grow (20%)
This bucket is purely for your long-term growth: think investment and retirement plan. Grow bucket is there solely for having your money to work for you and to grow your wealth as well as beat the inflation. Since many of us Malaysians are already contribute to our retirement fund through EPF contribution, I choose to use the money from this bucket for investments. Suggested percentage to put into Grow bucket: 20% of your net income.
There are a lot of different investment opportunities in Malaysia such as unit trust, stocks, REITs, gold, cryptocurrencies and properties. They are all opportunities for you to grow your money albeit they are differing slightly in risk-profile and the knowledge needed to start. Some may be suited in one type of investments while others don’t. Amidst all of these opportunities, one should always do their research and read more before venturing into an investment.
If you are having a hard time choosing an investment vehicle suitable for you, you can look into Amanah Saham Bumiputera (ASB) or Tabung Haji. ASB is limited to bumiputera only and Tabung Haji do have a quota for non-muslim. Both ASB and Tabung Haji gives you an average of 7.34% and 5.45% of dividend respectively per year (taken on last 10 years dividend average, not including bonus). You can never go wrong with one of these or even both as your first investment.
I won’t go into any more detail about investments as they are a very wide topic in itself. Maybe in the next entry.
The Bucket Budgeting Strategy’s main idea is to have you informed on your spending so that you will know how much you can afford to spend on something and how much your savings will be. By dividing your main income into three separate buckets, you can plan your finances in advance while also prepares you for the unexpected situation.
- Short-term urgent emergency? Fire Extinguisher.
- Fired from your job? Mojo bucket.
- Thinking of having your long-awaited Europe vacation? Smile.
- Fancy a dinner out? Splurge.
The key here is to follow your planning consistently and diligently while practising delayed-gratification on your dreams and goals.
The Bucket Budgeting’s Strategy might work wonders for me but not really for you because you have your own conditions and work situation. The percentages discussed in above are all from my personal suggestion and Scott Pape’s. It’s really up to you to set them to match according to your situation. For example, after two months into the system, I realised that I could cut down my spending even more and change my percentage weighting to 50% Blow, 25% Mojo and 25% Grow. After I reach my target Mojo amount, I will switch again to 50% Blow, 10% Mojo and 40% Grow. It all depends on how you manage your finance, the BBS acts only as the rough guideline.
For you guys whom might have monthly mortgage payments, you can think your mortgage as your Grow bucket as your property is technically already an investment. The remaining money can then be allocated accordingly for your Blow and Mojo bucket. Play around with the numbers, percentages and figure out what works best for you.
It might get a little bit confusing with the numbers and percentages. If you have any question or clarification, you can email me or hit the comment section. Keep hustling!