If you are trying to save for a dream vacation, house or to pay off debt, a budget is your first step towards making your financial goals a reality. It is important therefore to set a realistic budget so that it is easy, and you would be motivated to follow through.
Identify your expenses – It is important to identify all the expenses looking at your past spending, by analyzing your bank statements, receipts and financial files.
Some expenses are intermittent such as insurance payments and mortgage or loan instalments, therefore you’ll get the most accurate financial picture if you calculate an average for the past six months.
Monthly payments that might fluctuate such as your utility bills, transportation costs, groceries and clothing and discretionary expenses such as restaurant meals and entertainment should also be added. There should be an additional 5 percent incremental amount added to this list when setting the budget considering the inflation in Sri Lanka.
It is important to factor in unexpected bills, such as unplanned vehicle repairs, medical bills, gift purchases etc. A good rule of thumb is to add an extra 10 percent to 15 percent to that amount which you’ve allocated for your monthly spending to meet thus unexpected expenditure.
Identify your income sources – It is now important to list all your income sources and the income received respectively. In addition to your regular salary, get an accurate picture by adding any extra funds that come your way throughout the year, such as cash gifts, interest or dividends from investments and rental income.
By understanding how much money you need to stay afloat financially each month, you can determine whether your income could meet your expenses. While, there are those who have the tendency to resort to credit options in order to meet such expenditure, their credit piles up without their knowledge by the end of a period.
Either way, creating a budget gives you a clear sense of where you stand financially, allowing you to manage any wasteful spending and to re-evaluate where you want your money to go.
Savings and debt payoff goals – If you determine you’re making more money than you’re spending this amount can be earmarked for savings and to pay off debt. But if otherwise, it’s time to cut down your expenses, so you have something to save and prevent going further into debt.
In the event previously obtained credit facilities are of a lower rate than the current savings rates, it is still advisable to continue with your credit facility rather than settling it in advance and invest your savings at a higher rate.
The best way to figure out which item to slash of your expenses is to track your spending and record for every expense in a month. Seemingly insignificant items may add up to large amounts within six months.
It is now time to be merciless in cutting expenses until your budget is intact. You need to reduce expenses to a point where you are left with 10 percent to 20 percent of your income for savings. If you are unable to cut a significant amount from your budget, consider ways you can increase your overall income or investment income.
Recording expenses and tracking the progress – The best way to stay on top of your budget is to record all your expenses and income. Having to input expenses will cause you to think twice before splurging, and it’s especially satisfying and motivating to record when you’ve met a savings goal.
An easy way to keep track of your expenses is by making all your payments via your credit/ debit card. Most of the banks provide the SMS alert service and a statement free of charge at the end of the period. Also withdrawing a fixed cash amount only once ahead of the week in order to meet the ‘cash’ expenses incurred during the week is a convenient method to keep track of the cash payments made. There are numerous mobile aps designed for this purpose.
Once you determine the portion you can save each month it is wise to transfer it to your savings account immediately by way of providing a standing order to your bank account, so that it limits your spending naturally.
Explore other income sources – If you are in serious debt and wish for relief sooner, it is important to look into other avenues to generate income except for fixed salaried occupation. There are many options that are available once you explore such means. For E.g. if you meet the pre-requisite qualifications, you could provide private tuition for students. Income generated by such means should be directly channeled to set-off the debt.
When looking at increasing your interest income it is important to explore options which provides the best return for your savings. You should also consider the risk aspect of investing in such instruments. For the above purpose it would be ideal to accumulate funds in a savings account or short-term fixed deposit or unit trust account. It is also advisable to open multiple accounts for various purposes. For E.g. the fund which you’ve being building up to purchase a house should not be the fund that you pullout funds from to meet an emergency expense.
Be positive and realistic – It is important to abide by your budget with proper discipline in order to reach your financial goals. Breaking your budget occasionally is fine, providing you get right back on track as soon as possible in order to live a debt free, fulfilled life.
First Capital Money Market Fund – Unit Trust – The main advantage that unit trusts offer is the diversification to a portfolio of investments, which an individual without a large base of savings will otherwise not be able to obtain on his own. A diversified portfolio has investments in many companies, thereby reducing risk while enhancing returns. Because of a large fund base, the asset manager will also be able to negotiate better rates, getting a higher return on his asset pool while bringing in economies of scale. The management expertise and knowledge of the asset manager is also an added benefit of a unit trust, making it less time-intensive for the investor. An experienced fund manager will be more aware of interest rate movements and will know how to minimize risk, generating higher risk adjusted returns over the long term.
First Capital Money Market Fund is such a unit trust fund which is currently yielding 9.55%p.a. (as at 25/10/2020) which has the flexibility of a savings account. Unit Trust funds, accumulates funds from both individuals and corporates and channel them to different investments, striking a balance between the risk and return.
When investing in a unit trust, investors are assured of the active involvement of regulatory bodies and a high level of transparency. Bank of Ceylon, is appointed as trustee and maintains custody of the Fund’s assets, representing the interest of the investors. Moreover, the trustee monitors transactions carried out by the Fund daily. Financial statements are circulated regularly to investors which provide details of the Fund’s progress and statement of financial performance. The Securities and Exchange Commission of Sri Lanka (SEC) licenses and regulates unit trust funds, conducts periodic on-site audits, and rigorously examines the qualifications of fund managers.
Written by Imali Abeygunawardena of First Capital Asset Management Limited