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Budgeting For Dummies: A Very Simple Guide to Managing Your Finances & Developing a Healthy Mindset Regarding Money

Updated on March 22, 2012

Before I start, let’s get one thing clear: The purpose of budgeting is to allocate our money so that we have enough to spend on the things we want to buy and be able to do the things we want to do without neglecting our mandatory expenses. I was surprised when I once heard someone say that he hated budgeting because it meant not being able to spend on anything. That is a misconception.

Now that we’ve cleared that up, let’s happily discuss the subject of budgeting. I follow a very simple budgeting system that allows me divide my income proportionately. The first step is to apportion my salary into the following categories:

  • Buffer Fund
  • Retirement Fund
  • Abundance Fund
  • Expense Fund

Buffer Fund & Retirement Fund

The buffer fund and retirement fund make up my savings. My buffer fund ensures that I have money on reserve for emergencies and unforeseen cases such as retrenchment or instances where I may be temporarily unable to work. My retirement fund, of course, ensures that I have money set aside for retirement. Saving money is my first priority, and I’ve set up a separate bank account especially for it.

To develop the habit of saving, each month I deposit 20% of my total income into my buffer/retirement fund – that’s 10% for emergencies and 10% for retirement. I do this every month upon receiving my salary without fail before I spend money on anything else. And I’ve made a rule never to touch my savings except for its intended purpose, and when withdrawing from the buffer fund I have to reimburse whatever amount I take out as soon as possible. I’ve also invested some of the money set aside for retirement, and whatever earnings these investments make go into the retirement fund as well, but that’s a different story so I won’t go into detail.

My cat wondering how to budget his money. ;-)
My cat wondering how to budget his money. ;-)

Abundance Fund

The abundance fund is money I set aside to spend on whatever I want. Yes, you heard me right. I spend it on whatever I want, however “unnecessary” it may seem. The purpose of this fund is to develop the mindset of “there is more than enough money for everything”. Are you familiar with the Law of Attraction? It states that we have the power to turn our thoughts into reality. So it makes sense to cultivate thoughts that we would want turned into reality, right?

As of the moment, I put 5% of my monthly income into my abundance fund, and I usually spend it on my favorite Japanese food! (Japanese restaurants tend to be expensive where I live so this is a luxury.) I plan to increase this percentage as I increase my income, and in the future I’ll be able to fulfill my dream of traveling to Japan!

Expense Fund

Now we get down to the meat of things. After allocating money for the buffer/retirement fund and abundance fund, I am left with 75% of my total monthly income to spend on living expenses. I classify my expenses into four categories according to their level of importance:

  • Mandatory Expenses
  • Important Expenses
  • Nice Expenses
  • Unnecessary Expenses

Here is a chart showing where I put each of my expenses:

cat food and cat litter
(I’ve completely cut out all unnecessary expenses outside of the ones that I spend my abundance fund on.)
household supplies
personal care and toiletries
leisure and recreation
telephone and internet*
medication (nasal spray for my allergy)
membership fees
mobile phone load
other household expenses
*Notice that I put telephone and internet as mandatory. It’s because I need an internet connection in order for me to continue my online writing which contributes to my monthly semi-passive income.

After categorizing, I determine how much money is needed each month for all the items under mandatory expenses and important expenses, making sure that the total does not exceed 75% of my net monthly income. If there is still money left over, I allocate it for the items under nice expenses, otherwise I prioritize mandatory and nice expenses and sacrifice the nice expenses. I can live without new clothes, new shoes, and a new haircut every month, but I cannot live without food or paying rent.

Also, I try not to use my abundance fund to cover for the nice expenses. Believe it or not, I really do not mind not being able to have each month the things that I have classified as nice.

In Summary

It’s not really that hard to budget our money. But just like any other worthwhile endeavor (such as eating healthy, exercising, etc.), we do need the right mindset, motivation, and discipline in order to persevere with it. Just keep in mind that the goal of budgeting is not to make us miserable, but to make sure that we manage our money well.

Do you have a budgeting plan?

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    • Susan Ng profile image

      Susan Ng Yu 5 years ago from Cebu, Philippines

      Thanks, tich. :) Here's the budgeting plan Jiggy came up with: cat food = 50%, cat toys = 50% Hehe... ^_^

    • ripplemaker profile image

      Michelle Simtoco 5 years ago from Cebu, Philippines

      This is one great way to learn about budgeting :) Did your cat finally figure out how to budget his money?? heheh

    • Susan Ng profile image

      Susan Ng Yu 5 years ago from Cebu, Philippines

      Thanks, Robie. :)

    • Robie Benve profile image

      Robie Benve 5 years ago from Ohio

      Susan, this is a nice and simple way to look at budgeting, quite effective and to the point. Well done! :)