Budgeting your expenses

Quite often, when we mention “budgeting”, we’d often be told to differentiate our needs and our wants.

This 50/30/20 rule reminds us that on top of needs/necessities and wants, we should also set aside a portion of our budget for financial goals.

Personally, I prefer the 4321 rule shared by Alfred Chia (CEO, SingCapital) which he shared in an article in Berita Harian many years ago:

  • 40% Debt repayment
  • 30% Expenses
  • 20% Savings & investments
  • 10% Insurance

I’d translate the above as one should not spend more than 40% of his income on debt repayment and not more than 10% of his income on insurance.

If you are spending more than 40% of your income on debt repayment, you should consider looking into refinancing.

If you are spending more than 10% of your income on insurance, you might be spending more than you should. It would be good to review your insurance portfolio and restructure where appropriate.

I’d often be asked, “Farhan, 30% of income on expenses isn’t much!”

Well, it goes back to your debt repayment. If you have less to pay for debt repayment, you’ll have more for expenses.

“Is 20% of income on savings or investments enough?”

I’d say it is a good start. However, it depends on the size of your income as well as your financial responsibilities and commitments.

You may have to start lower, or you might be able to afford more than 20%.

If you have to start low, do commit yourself to start with 10% of your income. It is after all for your future benefit.

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